Jan. 14 (Bloomberg) -- Nortel Networks Corp., the phone equipment maker that was once Canada’s largest company by market value, filed for bankruptcy protection after losses mounted and financing dried up amid a deepening recession.

The century-old company, North America’s biggest maker of phone gear and worth about $250 billion at its peak in 2000, fell victim to reduced spending by customers such as Verizon Communications Inc. and competition from Cisco Systems Inc. The company made the filing a day before a $107 million interest payment was due and was granted protection in Ontario Superior Court today.

Chief Executive Officer Mike Zafirovski came to the company in 2005 tasked with turning around a business weighed down by a $3.2 billion accounting fraud and ensuing customer losses. Instead, Nortel has lost almost $7 billion since he took over as the company’s competitive position deteriorated further.

“It’s the end of a saga,” said Benoit Lalonde, vice president of fixed income at Laurentian Bank Securities, a unit of Canada’s seventh-largest bank. Laurentian doesn’t own Nortel debt. “I’m sad to see it happen but the tears were shed many months ago.”

Nortel’s U.S. subsidiary made a Chapter 11 filing in Wilmington, Delaware. Fourteen affiliates of the Toronto-based company’s financing unit are seeking similar protection in Delaware. Five units filed for bankruptcy there under Chapter 15.

Largest Creditors

Nortel shares fell 26.5 cents, or 69 percent, to 12 cents at 4:17 p.m. in trading on the Toronto Stock Exchange. The shares have lost 99 percent in the past year. Trading in Nortel shares was suspended by the New York Stock Exchange.

Bank of New York Mellon Corp. was listed as Nortel’s largest unsecured creditor in its role as trustee on more than $3.8 billion in notes. Export Development Canada, a government agency, is owed $186.7 million and will provide as much as $30 million in financing for 30 days to help the company restructure.

Sales have declined since Nortel sold its high-speed mobile- phone unit to Alcatel for $320 million in 2006. The company got rid of the division to focus on a newer wireless technology called WiMax.

As of Sept. 30, Nortel’s debt amounted to $6.3 billion, including adjustments for operating leases, pension deficits and other items. The company has $1 billion in bonds that come due in 2011. Total liabilities amounted to almost $12 billion, while cash stood at $2.3 billion.

‘New Nortel’

Ontario Superior Judge Geoffrey Morawetz approved an order shielding Nortel from creditors and lawsuits while it attempts to restructure. The order is set to expire Feb. 13, although Nortel can request an extension.

“This is not about the end of Nortel,” Derrick Tay, the company’s lawyer, said at a hearing in Toronto today. “This is about the beginning of a new Nortel.”

The company probably would have been able to operate another year before running out of cash, said John Moore, an analyst at KDP Investment Advisors in Montpelier, Vermont. By filing for protection now rather than waiting, the company has a better chance of recovery, he said.

“Today they haven’t run out of money,” Moore said. “It’s just that there’s this stress because we’re in this environment and they’re planning way ahead.”

Nortel Networks said in its Chapter 11 filing that it has more than 25,000 creditors and expects to make a distribution to those creditors that are unsecured. Nortel Networks Capital has more than 100 creditors owed $100 million to $500 million, according to court papers.

Flextronics

Flextronics International Ltd., a contract manufacturer, is owed more than $50 million. The Singapore-based company said it has worked to reduce its exposure to Nortel.

Nortel said in a statement the financial crisis added to its challenges, and the recession “directly impacted” its ability to complete a turnaround begun in late 2005. The company said its day-to-day operations won’t be affected by the filing.

The Nortel affiliates that filed under Chapter 15 of the U.S. bankruptcy code did so because the provision helps companies with cross-border operations reorganize partly in the U.S. It allows foreign petitioners to fend off U.S. creditors while reorganizing at home.

Nortel affiliates in Asia, the Caribbean and Latin America, and Nortel’s Government Solutions unit aren’t involved in today’s filings, the company said.

‘Sound Financial Footing’

Nortel said it will ask the courts to restrict trading by investors owning at least 4.75 percent of its common stock or any series of preferred shares of Nortel Networks Limited.

Nortel is represented by lawyers from Cleary Gottlieb Steen & Hamilton in New York and Morris Nichols Arsht & Tunnell of Wilmington. Lazard Freres & Co. LLC is the restructuring adviser.

The company paid a $35 million fine in 2007 to settle U.S. Securities and Exchange Commission claims that it defrauded investors by manipulating earnings from 2000 to 2003. The company didn’t admit or deny wrongdoing.

Nortel restated earnings going back to 1999 after probes by regulators in 2004 indicated executives incorrectly booked revenue, inflating sales figures.

Zafirovski had sought to revive Nortel’s fortunes by cleaning up the balance sheet and reducing the workforce by 18 percent since he started. Demand for Nortel’s gear, mainly based on older code division multiple access technology, has waned as customers move to faster systems.

“Nortel must be put on a sound financial footing once and for all,” Zafirovski said in today’s statement. “These actions are imperative so that Nortel can build on its core strengths.”

Credit Crunch

Money markets in the U.S. seized up following the Sept. 15 failure of the securities firm Lehman Brothers Holdings Inc. Banks stopped lending as they hoarded cash, pushing the country into a deeper recession. That’s making it more difficult, and more expensive, for companies like Nortel to find new financing.

The company could sell the CDMA unit to raise money, RBC analyst Mark Sue said in a report in November. The challenge is that too many asset sales may conflict with Nortel’s debt covenants, said Sue, who cut his target on the stock to $0.

Nortel began as Northern Electric and Manufacturing in 1895, supplying equipment for Canada’s start-up telephone system. The company was the first to produce dial equipment in the country, for a brewery in Montreal, and its switches were used in the first Trans-Canada telephone toll system in 1932.

Federal Police

Nortel’s U.S. stock reached a split-adjusted high of almost $900 in 2000 as the dot-com boom fueled demand for telephone equipment. Since then, the company lost out to Cisco and Juniper Networks Inc., whose products enabled telephone companies to transmit phone signals over Internet lines.

The plunge in the shares prompted a series of lawsuits, with investors accusing Nortel of perpetrating an accounting fraud that included improperly boosting sales by accelerating the booking of fiber-optic equipment contracts. Nortel fired CEO Frank Dunn and other executives as a result.

The company agreed in February 2006 to pay $575 million in cash and issue 62.9 million shares to settle the suits, and Nortel’s insurers agreed to pay $243 million. The settlements won approval Dec. 26, 2006, in New York and a month later in Canada.

Last year, Canadian federal police charged Dunn, former Chief Financial Officer Douglas Beatty and former Controller Michael Gollogly with fraud for misstating results in 2002 and 2003. They also were charged with accounting fraud by the U.S. Securities and Exchange Commission and the Ontario Securities Commission. Dunn is fighting the charges and suing for wrongful dismissal, according to his counsel, McCarthy Tetrault.

The case is Nortel Networks Capital Corp., U.S. Bankruptcy Court for the District of Delaware (Wilmington).

To contact the reporters on this story: Bob Van Voris in New York at rvanvoris@bloomberg.net and; Joe Schneider in Toronto at jschneider5@bloomberg.net

Last Updated: January 14, 2009 16:25 EST