By Peg Brickley
In a move that could break the $9.5 billion international bankruptcy of Nortel Networks Corp. (NRTLQ) wide open, a
bond trustee has asked for "a simple legal determination" that could put a lid on the interest due on billions of
dollars worth of debt.
Judge Kevin Gross is being asked to rule that bond investors are entitled only to the federal judgment rate of
interest rather than the contract interest rate on more than $4 billion in debt issued by U.S. elements of the now-
defunct maker of telecommunications equipment.
The request comes from the trustee for bonds issued by a unit tied to Nortel's Canadian parent, which says capping the
interest investors in Nortel U.S. bonds collect means a faster payday for creditors. If it succeeds, the effort would
deal a blow to hedge funds that bought Nortel U.S. bonds at steep discounts after the company was swept under in 2009,
gambling that the bonds would pay off at face value, with interest, once the dust settled.
Canadian bond investors wonder at the amount of interest that is driving Nortel's international units toward a trial
that means more legal fees and a longer wait for creditors. Wilmington Trust NA, as trustee for 6.875% bonds issued by
Nortel Networks Ltd., says a ruling now would avert the court fight with the company, whose affairs are being handled in
the Canadian parent company's insolvency proceeding.
"Absent this court's ruling...the spending on professional fees will continue unabated, and Nortel's global creditors
will continue to wait with little more in view than the inevitable appeals and more delay," wrote a representative of an
investor in the Canadian bond issue, River Birch Capital LLC, a New York distressed investing specialist that supports
Wilmington Trust's request for a fast decision on interest rates.
A lawyer for Nortel U.S. didn't respond to a request for comment on the push from the trustee for Canadian bonds. A
lawyer for Nortel U.S.'s creditors panel, which consists mainly of U.S. bondholders, didn't respond to a request for
comment. Lawyers for the trustees for the challenged Nortel U.S. bond issues didn't respond.
In court papers, the trustee for the Canadian bonds says the interest-rate cap would give Nortel U.S. bond investors
the face amount of the debt, plus $18 million a year interest, for a total of nearly $4.2 billion. Parent Nortel Canada,
then, would be content to take the leftovers from the $7.3 billion in cash raised in the company's global going-out-of-
business sale, according to Wilmington Trust.
The excess money would go to Canadian pensioners, former employees and trade creditors, as well as to investors in the
Nortel Canada bonds, court papers say.
The push for a fast answer on interest comes after two years of expensive arguments among Nortel's creditors, most of
whom "have received virtually nothing" from the cash that was stacked up years ago from the sale of the
telecommunications company's businesses and patents.
Lawyers and other advisers have drained nearly $1 billion out of Nortel's coffers, and there is no end in sight to the
spending as professionals gear up for a trial slated to start April 1 over how to allocate the sale proceeds.
The allocation trial will decide the split of cash among Nortel's national factions, and until it is over, nobody but
the lawyers will get paid. Even the nonsale cash, including more than $900 million held by Nortel U.S. and $500 million
held by Nortel Canada, awaits distribution after the allocation trial and the appeals that follow have concluded. That
fact has rankled bondholders for some time.
"Allocation is not the real issue," wrote lawyers for Wilmington Trust, in its role as trustee for the Canadian bonds.
"Rather the ultimate question is how much can unsecured creditors obtain."
By deciding now how much interest to give investors in Nortel's bonds, the bankruptcy judge can save "untold delay and
countless millions in needless, additional" professional fees, Wilmington Trust's attorneys contend in papers filed
Friday in the U.S. Bankruptcy Court in Wilmington, Del.Wilmington Trust is seeking a Dec. 3 hearing for its request for
a ruling on the bond interest.
Nortel filed for bankruptcy protection in its home country of Canada, in the U.S., the U.K. and elsewhere in 2009,
after a long decline left the former telecommunications powerhouse unable to pay the freight on billions of dollars
worth of debt.
Wilmington Trust's request is couched as a "claims objection" filed in its role as trustee for Nortel Networks Ltd.
6.875% bonds. The objection is aimed at claims filed on behalf of investors in bonds issued by U.S. units of the
company, with Bank of New York Mellon Corp. ( BK ) and Law Debenture Trust Co. of New York as trustees.
Bank of New York has filed one claim for $2.8 billion and another for $1.15 billion in Nortel's case. Law Debenture
has filed a claim for $152 million for another issue of notes. Combined, the bond issues account for 77% of the claims
against Nortel U.S., Wilmington Trust's lawyers said.
The expectation that Nortel's U.S. Chapter 11 case will pay off at the contract rate has kept trading prices for some
issues of Nortel debt at around par levels, while other bonds have risen far above par.
Trading data indicate some investors registered Wilmington Trust's challenge but are betting it will fail. A $450
million issue that was selling for $1.16 on the dollar dropped to just above $1.14 Friday, with multiple millions of
dollars trading. Similar action was registered in a $550 million issue that has been trading at prices that indicate
investors think they will collect interest at the contract rate. Both debt issues have since recovered and are holding
at levels that indicate investors are expecting to recover more than the federal judgment rate of interest, the rate
that Wilmington Trust says should apply.
Wilmington Trust contends the Nortel U.S. bonds aren't entitled to the contract rate because they aren't secured. They
are backed by guarantees from Canadian Nortel's units, but Nortel Canada is insolvent and not compelled to make good on
the guarantees when it comes to post-bankruptcy interest, Wilmington Trust says.
(Dow Jones Daily Bankruptcy Review covers news about distressed companies and those under bankruptcy protection. Go to
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