Nortel Talks on Splitting $9 Billion Fail, Mediator Says

Creditors of Nortel Networks Corp., the defunct telecommunications company, failed to agree on how to divide about $9 billion in cash, the judge overseeing the mediation said.

Prices on $1.675 billion of Nortel bonds plunged as much as 4 percent after yesterday’s announcement by mediator Warren K. Winkler, the chief justice of Ontario. Winkler “has concluded that further efforts at mediation are no longer worthwhile,” according to an e-mailed statement.

The mediation involved Nortel’s Canadian, U.S. and European entities and their creditors, including retirees. The European group, led by bankruptcy administrators in the U.K., is seeking a share of the cash on behalf of 38,000 pensioners.

“When you know that litigation can take years and delay recoveries for everyone, you would think the parties could figure something out,” Kevin Starke, a senior analyst with CRT Capital Group Inc., said in a telephone interview.

The groups have been fighting over a shrinking pile of cash that won’t cover all of the debts owed by Nortel and its units. Creditors have presented more than $36 billion in claims in Canada, according to a status report filed in a Toronto court in October.

Retiree Payments

Bankruptcy administrators in the U.K. are demanding $2.67 billion from Nortel’s main U.S. unit, claiming the money is needed to pay the retirees, according to court documents.

A group that says it represents about 20,000 Canadian retirees claimed they have been forced to accept cuts in benefits while former employees of Nortel’s U.S. and U.K. units have not. The group, known as Nortel Retirees and Former Employees Protection Canada, blamed bond investors for the troubles faced by pensioners.

“We have been treated as pawns in this game by vulture bond funds,” Don Sproule, the group’s president, said in a statement.

A group of bondholders that participated in the mediation said they weren’t responsible for the failure to reach a deal.

“The bondholder representatives were not the ones that walked away from this mediation,” the group said in an e-mailed statement. “It is unfortunate that others appear to have chosen litigation rather than a consensual resolution that would get distributions out to creditors.”

Bondholder Group

The bondholder group, represented by the law firm Milbank, Tweed, Hadley & McCloy, LLP and the financial advisory firm FTI Consulting, includes hedge funds Centerbridge Partners LP, GoldenTree Asset Management and Monarch Alternative Capital LP.

The talks were designed to prevent court battles in Canada, the U.S., the U.K. and France, where conflicting rulings by different judges would be “a catastrophic outcome,” Winkler wrote in April, when the current mediation started. The first two mediation efforts failed.

Nortel, based in Mississauga, Ontario, filed for bankruptcy in 2009 in Toronto, Delaware, the U.K. and France, with various units under the control of separate teams of lawyers and under the jurisdiction of different courts.

James L. Bromley, who was lead attorney for Nortel’s U.S. bankruptcy, didn’t return e-mail and phone messages seeking comment on the talks.

U.K. bankruptcy officials claim Nortel’s U.S. and Canadian units siphoned money from the European units for years, leaving them unable to pay pensioners and other creditors.

Financial Transfers

To determine whether that is true, courts would have to dissect thousands of financial transfers made among the various Nortel units, CRT Capital’s Starke said. For each transfer, courts will have to determine whether the companies involved were solvent at the time the money moved.

Starke said he had expected the parties to avoid fighting in court by settling.

“I find it all a little surprising,” he said.

Yesterday the company’s 10.75 percent bonds that mature in 2016 fell 3.8 percent to 112.25 cents on the dollar, and its 10.125 percent bonds due in July fell as much as 4 percent, according to Trace, the bond price reporting system of the Financial Industry Regulatory Authority.

Today, the 10.75 percent bonds climbed less than 1 percent to 112.50 cents on the dollar. The 10.125 percent bonds fell by about 0.5 percent to 112.125.

The case is Nortel Networks Inc., 09-10138, U.S. Bankruptcy Court, District of Delaware (Wilmington).

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