The Globe and Mail today is reporting that the Canadian Telecom manufacturer Nortel is going to file for Bankruptcy Protection today. Facing a slowdown in orders, an uncertain future, and previous concerns about its ability to continue going, the board of directors has authorized that the company essentially shut down, file for protection, and keep what cash it has on hand until a final disposition for the company can be made. The problem comes in with the huge line of banks that are also already creaking not getting full value for their investment in Nortel.

While not bankrupt – the company has an estimated $1-billion in its coffers – Nortel is burning though cash at an impressive clip, and has $4.5-billion (U.S.) in long-term debt. Major lenders include JPMorgan Chase, Citigroup and Royal Bank of Canada. Seeking court protection would give the company more latitude in selling or restructuring factories and research facilities. Air Canada, for example, went this route in 2003, continuing to fly while cutting jobs and reworking its debts. Duncan Stewart, an analyst at DSAM Consulting in Toronto, said: “The issue is not whether or not they can pay it. … It’s the idea of: If you know you’re eventually going to default anyway, why not do it now and keep the … interest payments you would have shelled out?” Source: Globe and Mail

The Globe points out that with this filing today, they might lose business with their bigger customers who are worried about the survival of the company. When you make equipment you should be around to service it as well. This will mean that it will be very hard to sell Nortel gear with this cloud hanging over their head, and might lead Nortel to surface in the dead pool as this gets worst. Moreover, this will make it harder for people who want to invest in the company, because this will mean that all the shareholders are wiped out, and bondholders will not get their payment. It will be much harder for Nortel to raise cash, or do business.

While this might be good to preserve cash the company has, this is going to fuel the already hard to get money for your business routine from banks, and other sources. There is going to be blow back on this one that might not hit Nortel, but will hit companies that are in similar situations in the future.

Tags: Nortel, bankruptcy protection, telecom, Canada, cash, bonds, stocks