News

Nortel Networks Corp., the humbled giant of Canadian technology, is vowing to re-emerge from creditor protection a stronger company, but first needs to win over nervous customers and suppliers and possibly secure financial aid from skeptical governments.

The telecom company ended a long and storied decline Wednesday by filing for bankruptcy protection, which gives it breathing room, but presents fresh risks of alienating suppliers and customers.

Perhaps just as daunting, its CEO said that the company has yet to figure out a master plan on how to re-emerge a stronger company.

Executives will focus first on stabilizing its customer and supplier base over the coming days before moving on to formulate a survival plan that they hope to take to the board of directors and creditor committee within five months.

An approved agenda will most likely include the sale of assets, but whether that disposition leaves the Nortel brand alive or amounts to a full liquidation of the century-old company remains hotly debated.

“A breakup is not a top priority for the business. On the contrary, it's to be able to come out the other side as a nimbler, more focused, successful technology company,” Mike Zafirovski, the president and chief executive officer, said in an interview. “There is no announcement today regarding strategy.”

Some analysts, however, said the company has little choice but to sell its industry-leading technology at discount prices. “Asset sales could not happen at a worse time and if anything, Nortel will now have to sell its numerous business segments at fire-sale prices,” said Mark Sue, of RBC Dominion Securities Inc.

Competitors such as Alcatel-Lucent, Cisco Systems Inc., Telefon AB LM Ericsson, Nokia Siemens Networks and Huawei Technologies Co. Ltd. will mop up Nortel's market share, with most of them having programs in place to trade out Nortel gear, he added.

Flextronics International Ltd., which manufactures 75 per cent of Nortel's gear and is owed at least $50-million, had grown increasingly worried about its exposure and was demanding special terms from Nortel to keep production lines running.

The supplier reached an agreement with Nortel early Wednesday morning, ensuring it will receive $120-million of payments for existing inventory.

In addition, Nortel has agreed to pay Flextronics for products and services on a weekly basis.

The Singapore-based company gets about 8 per cent of sales from Nortel. Its shares tumbled 6 per cent Wednesday on news of the bankruptcy filing.

No other supplier, however, was given the opportunity to negotiate a side deal, and many are now worried about future commitments. One U.S.-based supplier with 60 employees said that over the course of the past year, Nortel had gradually extended the time it took to settle accounts to more than 100 days from just 45.

Some executives said Wednesday that they are telling their technology departments not to sign new deals with Nortel.

On Wednesday, Mr. Zafirovski spent most of his day on the phone reassuring customers on an individual basis that it is business as usual at Nortel. He aimed to speak to 50 of his largest customers within the first 48 hours, he said.

Mr. Zafirovski, who came with a stellar reputation from Motorola Inc. and General Electric Co. to Nortel in 2005, said he plans to stay on at the helm and see the company through court protection.

“It's not what I signed up for, but this is a proven method for turnarounds that companies do take as an option,” he said. “We will use this opportunity to restructure the company financially and operationally.”

Nortel's move to protect assets from creditors in North America and Europe comes even as Nortel has about $2.5-billion of cash on hand, but relieves it of hefty interest payments on $4.5-billion of debt. With a burn rate of about $100-million a month, the company was likely able to fund operations without protection for at least a year.

But sources said the company's board opted for court protection because it was unable to raise conventional bankruptcy loans, known as debtor-in-possession or DIP financing. Typically, banks are eager to make DIP loans because they charge high rates and rank as one of the best-secured loans, but during the deepening credit crunch few banks are willing to lend well-protected loans to distressed borrowers.

Without a DIP loan, one source said, Nortel's board opted to file for protection while it still had a large cash reserve and before it was required to pay more than $100-million Thursday to certain bondholders.

Mr. Zafirovski has spoken regularly to federal Industry Minister Tony Clement about the health of the sector and his company's future, but federal officials say he did not seek a bailout from Ottawa.

Instead, Nortel has worked with the federal Export Development Canada to ensure it will continue to have access to working capital while under creditor protection. EDC, which has been financing Nortel's exports since its inception in the 1970s, now has $180-million in debts outstanding, primarily in the form of contract insurance which provides a performance bond to Nortel customers that is paid back when the contract is concluded.

Those unsecured loans will be paid back over the next 30 to 60 days by the company's existing clients, EDC spokesman Phil Taylor said. And the agency will not accept any more bonds. Instead, Nortel and EDC account executives negotiated a $30-million secured facility that gives the company more flexibility to use the cash.

“We're at the table right now, and we're there to help them out. … It's not like we're not in the picture and there to help, but everything is on a commercial basis,” Mr. Taylor said.

Nortel's bankruptcy filing had an immediate and potentially devastating impact on customers, suppliers, employees and other creditors in many corners of the globe. Among the hardest hit are the 1,300 Nortel employees who accepted severance packages last fall. Mr. Zafirovski confirmed that Nortel's severance payments still owed to laid-off employees are frozen by the bankruptcy filing and will be added to the company's debts.

Legal experts said the severance payments typically rank behind other debts in bankruptcy proceedings, which means it is likely the company will have insufficient cash to pay most of the owed compensation.

In London, British officials were left wondering if Nortel would be able to fulfill its commitment to provide about $58-million in cash and the network infrastructure for communications systems at the city's 2012 Olympics. Nortel is also a major sponsor for Vancouver's 2010 Olympics, but a spokesperson said the company has met most of its commitments.