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Jan. 14, 2009

Today is a sad day for many in Canada, but it was almost written on the wall.

North America's biggest manufacturer of telephone equipment, Nortel Networks has officially filed for bankruptcy protection in the U.S. today, as the global economic downturn further cuts into its once high-flying telecom equipment business.

Nortel's bankruptcy filing came just a day before the Toronto-based company was due to make an interest payment of approximately $107 million on some of its short-term debt.

The beleaguered company and a number of its affiliates filed for Chapter Eleven bankruptcy protection in the U.S., according to a court filing.

Nortel's stock plunged more than 75 percent to less than eight cents in electronic pre-market trading in Toronto today.

Duncan Stewart, an analyst at DSAM Consulting in Toronto said "based on this bankruptcy filing, the board of directors must believe that not only is the fourth quarter bad, but that the first quarter is going to be just as bad or most probably even a lot worse."

He added "although Nortel has some cash left for the short term, even the medium-term outlook isn't enough to make the company viable as a going concern."

Nortel's major creditors include Bank of New York Mellon, with claims valued at nearly $4 billion, according to the court filing in U.S. bankruptcy court for the district of Delaware.

"It's obviously a remarkable transformation from where it was as the largest company in Canada worth about 35 percent of the TSX in just 2000," said Gavin Graham, director of investments at BMO Asset Management. "But this is a real-time reflection of the way that the telecommunications industry has changed, not just in Canada and the U. S. but globally."

Nortel's stock has dropped along with the company's fortunes, sinking into penny-stock territory in recent months. In mid-2000, it was worth more than CDN $1,100 a share, adjusted for a reverse-split stock consolidation that took place in Nov. 2006.

Overall, Nortel has faced some intense competition from North American and European rivals such as Alcatel-Lucent, as well as many others.

Nortel has also suffered as telecom companies scale back spending on the equipment that the company makes.

Just in November, it reported a $3.4 billion third-quarter loss, cut its 2008 outlook and announced 1,300 layoffs, or about 5 percent of its then-current workforce. It also said it would freeze salary increases, cut back on outside consultants and review its real estate portfolio, one more time.

The global economic meltdown has accelerated Nortel's problems, leading it to warn in December that because of its current dismal conditions, its business was rapidly coming under increased pressure and its cash position and liquidity were deteriorating fast.

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Source: Nortel Networks.