When Nortel Networks Corp. sought court protection from its creditors last January, its chief executive officer, Mike Zafirovski, promised creditors and employees that the telecommunications company would stanch its debt wounds and re-emerge in fighting form.
But the pledge, like Mr. Zafirovski, was gone by summer.
Replacing the dream was a grim calculation by Nortel's advisers and presiding courts in Canada, the United States and Europe that the company could not survive as a going concern because its debts were too great and its global footprint too small. Shouldering $4.5-billion (U.S.) of long-term debt and billions of dollars more in pension and supplier claims, Nortel opted to break up the company and sell its far-flung divisions.
Liquidation is a brutish process in which assets are quickly sold for a fraction of their worth to buyers who have the advantage of knowing that the seller is desperate.
In the case of Nortel, the company's auction leverage was particularly shaky because squabbling creditors in a variety of jurisdictions were scaring away potential buyers. Complicating matters, Nortel's head office in Brampton, Ont., had run dangerously short of cash to finance the auction.
A liquidation wipeout? Hardly.
One year after it filed for bankruptcy protection in Canada, the United States and Europe, Nortel has pulled off something that even its advisers didn't think was possible: It has generated more than $3-billion in cash from a series of robust auctions that have gone unchallenged by initially resistant creditors.
Along the way, it settled a $3-billion tax claim from the U.S. Internal Revenue Service and scraped together enough excess cash to pay about $30-million to help replenish underfinanced pension funds.
Nortel's cash pot could grow again, by as much as $1-billion, sources say, if the company decides to sell its last remaining asset – a treasure trove of patents that generate a rich royalty stream.
“We got way more than we thought possible,” said Derrick Tay, an Ogilvy Renault LLP lawyer who leads Nortel's insolvency team.
“Way more” is still well short of Nortel's staggering debt load, which means the company's mostly unsecured creditors, pensioners and laid-off employees likely still face double-digit losses on their claims. If there is any comfort for these hits, it is that the losses could have been much worse had Nortel not been able to stretch bankruptcy laws to avoid a distressed liquidation during the worst months of the global crisis.
The bleaker fate was avoided when Nortel won court approval last year to dismantle the company under the pliable umbrella of the Companies' Creditors Arrangement Act (CCAA), an act that was intended only to help Canadian businesses restructure their debts.
“There were no textbook answers for us,” said Murray McDonald, an Ernst & Young executive and court-appointed monitor overseeing the Nortel bankruptcy.
Nortel is the largest, and only global, company to seek court protection under CCAA to effectively liquidate its businesses.
“No one has ever done anything like this before. Everyday we were faced with a problem that had never been dealt with before,” Mr. Tay said.
The biggest challenge Nortel faced was keeping its creditors in several countries in line. Typically, creditors block CCAA liquidations because the law gives the courts enormous power to stay or block creditors from exercising their rights to seize assets.
In Nortel's case, Mr. Tay said there was initially “a lot of kicking and screaming” from creditors in many jurisdictions. The company won over its creditors by designing, with court approval, a unique and untouchable U.S. bank account, referred to by advisers as the “black box,” which holds Nortel's auction proceeds. When the sales close as expected later this year, courts in Canada, the United States and Europe will navigate how the money is allocated to creditors.
Once creditors were pushed to the sidelines, Nortel's legal and financial advisers were able to auction its assets with standard takeover tactics. In each sale of the company's wireless, ethernet and networking divisions, stalking-horse bidders were designated, with court approval, and bidders were invited into data rooms to research potential bids under a deadline.
When auction deadlines arrived, suitors were called into a boardroom in the offices of Nortel's U.S. law firm, Cleary Gottlieb Steen & Hamilton LLP, where offers were tabled like a giant poker game until the bidding stopped.
“Until the auctions were over, nobody knew how much we were going to raise,” Mr. Tay said.
