Pensioners take on Nortel bondholders over division of assets

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Canadian pensioners at Nortel Networks Corp. are heading into a rare cross-border trial in May to try to ensure more of the defunct company's remaining assets are allocated to the Canadian division in an effort to boost the company's underfunded pension plan.

The hearing, which runs from May 12 to June 27, will be conducted using video links before two judges – one in Toronto and one in Delaware – and will hear arguments from lawyers from Canada, the U.S. and Britain about how the remaining Nortel assets should be divided among the three jurisdictions.

Creditors, including Nortel pension funds and bondholders, have submitted claims worth $36-billion, while estimated assets currently total about $9-billion, including $7.3-billion raised from asset sales.

Canadian pensioners say the heart of their battle is a dispute with Nortel's bondholders, who they accuse of manoeuvring to have more assets assigned to Nortel's U.S. estate in an effort to improve their odds of receiving more than $1-billion of unpaid interest on their bonds from the time Nortel filed for bankruptcy protection in 2009.

Retired Nortel employee Don Sproule, president of Nortel Retirees and Former Employees Protection Canada, said Nortel's bonds have changed hands repeatedly since the company's bankruptcy filing and are now largely in the hands of hedge funds that bought them at prices as low as 15 cents on the dollar.

"I think these people that have bought the bonds are speculators – they are late arrivals – and that's the game that's being played," he said Tuesday.

Since 2009, he says Nortel's bonds have traded up in value to over 100 per cent of their face value. Mr. Sproule says their pricing is a speculative valuation that suggests bondholders are gambling on a hope they will end up receiving unpaid interest since 2009.

Unpaid bond interest that accrues after a company files for bankruptcy protection can only be paid if the company becomes solvent again, which will only happen if Nortel's U.S. operation receives a large proportion of available assets in the distribution.

Mr. Sproule says if that goal is accomplished, however, it will reduce the assets allocated to the Canadian division and especially to the underfunded Canadian pension funds.

"In the Nortel case, there is clearly not enough money to go around to all the estates, and what we've been seeing is that there is a push to make the U.S. estate solvent, and that comes at the detriment of the Canadian estate," he said.

A lawyer for bondholders would not comment Tuesday.

Mr. Sproule said bondholders have been advocating "dumping" many global corporate costs into the Canadian estate "to keep the U.S. estate as clean as possible" so it can return to a position of solvency and pay interest on the bonds.

Nortel's Canadian retirees have seen their benefits cut to 70 per cent of their former level in Ontario and to 55 per cent in other parts of Canada outside Ontario because the Canadian pension plans had large shortfalls when Nortel filed for bankruptcy protection.

Anne Clark-Stewart, a director of the Nortel retirees' committee, said "morally and ethically" pensioners deserve a higher claim on a company's assets in bankruptcy, "but legally we are lumped in with the junk bond holders – we're all unsecured creditors."

Diane Urquhart, a financial analyst who has been helping a group of disabled former Nortel employees with a separate class action over the collapse of the company and their health benefits, calls the upcoming trial "expensive and unnecessary."

According to her tally, legal and other professional fees in the U.S., Britain and Canada have now hit $1.3-billion. And according to court documents, just the Canadian Nortel estate is expected to pay another $94.6-million (U.S.) in fees by October.

"This is what makes it repugnant now," Ms. Urquhart said. "I don't think anybody would have felt quite so badly if there was no money. And if the lawyers hadn't taken the money that there was."

Mr. Sproule said Nortel's retiree committee has also been trying to secure access to the court video feed so they can watch the lengthy trial without having to travel to Toronto in person, where they may still have to watch proceedings on a screen in an overflow room because the main courtroom is expected to be filled by lawyers.

"It's been kind of ludicrous.... We're wondering if we'll even get a chance to attend," Mr. Sproule said.

Lawyers participating in the hearing have been offered the right to view the webcast from remote locations to reduce the number who will attend the hearing in person. Court documents say the video and webcasting technology will cost $1.3-million to install, which will be covered by the parties involved in the hearing.