In the news

By Janet McFarland
The Globe and Mail

Nortel Networks Corp. bonds traded sharply lower Wednesday after two judges in Canada and the U.S. ruled the failed telecom company’s $7.3-billion in remaining assets should be distributed proportionally among all of Nortel’s subsidiaries.

Nortel’s bonds were trading well above face value prior to Tuesday’s court ruling, but immediately started falling as bondholders digested the ruling and decided bonds guaranteed by Nortel’s U.S. subsidiary will likely not recover their full face value if the rulings stand.

Nortel’s bonds yielding 10.75 per cent and maturing in July, 2016, were trading at 113.75 cents on the dollar prior to the rulings Tuesday, and fell as low as 83 cents on Wednesday, but recovered to 88.75 by later in the day.

Stephen Snowder, associate editor of distressed debt research firm Reorg Research, said that prior to the ruling bondholders were confident that the judges would choose either the approach championed by U.S. claimants or by the Canadian parent company, both of which argued their units deserved most of Nortel’s remaining assets.

In either scenario, bondholders felt they would have a claim to many of the assets because they held bonds issued by Nortel’s Canadian parent but guaranteed by the U.S. subsidiary. As well, they had hoped for additional bond interest that had accrued after Nortel’s 2009 filing for bankruptcy protection.

Mr. Snowder said bondholders did not expect the proportional “pro rata” allocation of assets that the judges instead favoured in their ruling, dividing the assets more evenly among all claimants. The decision also means there may be no payment of additional interest that has accrued since 2009, he said.

“It’s certainly possible that these bondholders are going to get much less than they were hoping for, which explains the crashing prices,” he said.

The bonds are held by distressed debt investors who bought them from the original holders after Nortel filed for bankruptcy protection.

Judge Kevin Gross of the U.S. Bankruptcy Court in Wilmington, Del., and Justice Frank Newbould of the Ontario Superior Court ruled Nortel’s assets should be distributed proportionally to Nortel’s Canadian, U.S. and U.K. divisions, saying they favoured a solution that would be equitable to all sides.

Benjamin Zarnett, who represented the Canadian monitor overseeing Nortel’s wind-up, said it was good that the judges came to the same conclusion on the allocation, “so that it can advance the administration of the Canadian estate and work toward distribution of funds to creditors.”

Lawyer D.J. Miller, who represented Nortel’s 33,000 U.K. pension plan members, said the judges adopted the same pro rata allocation that the U.K. pensioners had proposed. Ms. Miller said the rulings are “a reminder that equity among creditors is a fundamental bankruptcy principle” that will prevail in “a territorial tug of war.”

The decision means 30,000 Nortel retirees in the U.K. and 20,000 in Canada should see more recovery of assets than they would have received under other distribution options tabled with the judges.

While Justice Gross estimated in his ruling that all claimants could recover 71 per cent of what they are owed under a pro rata distribution, Ms. Miller said it is too soon to know with certainty how much the U.K. pension fund will recover of its estimated $3-billion shortfall.

Lawyer Mark Zigler, who represented Canadian pensioners, said Tuesday it is likely pensioners will recover less than 71 per cent once all claims are submitted, but the pensioners “are very pleased” with the decision.

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