Nortel Judge Approves Bondholder Deal for Interest Payments

Nortel Networks Inc. won permission from a U.S. judge to pay about $1 billion in interest to bondholders over the objections of Canadian pensioners of the defunct telecommunications company who say their benefits are being cut.

The decision was opposed by Canadian creditors of Nortel’s parent company who said bondholders, including a group of hedge funds, are being overpaid by about $900 million.

U.S. Bankruptcy Judge Kevin Gross in Wilmington, Delaware, disagreed, ruling that the payments are part of a settlement that capped the maximum amount of interest the bondholders may receive at $1 billion. Without the deal, bondholders may have won a court fight in which they could have demanded even more.

“Given the massive potential amount of post-petition interest which could be owed if calculated at the contract rate, the court is convinced that the terms of the settlement agreement are reasonable,” Gross said in his ruling.

Nortel’s parent company, based in Mississauga, Ontario, has been fighting with the U.S. unit over how to split about $7 billion raised in a court-supervised sale of assets, including a trove of patents auctioned in 2011 to a group that included Microsoft Corp., Apple Inc. and Sony Corp.

Accumulated Interest

Canadian creditors argued that the bondholders, who are owed about $4 billion, deserve a rate of less than 1 percent on interest accumulated since the company filed bankruptcy in 2009 in Delaware, Toronto and the U.K.

Nortel may not have enough money to pay the interest in full depending on how Gross and Ontario Superior Court Judge Frank Newbould in Toronto decide to divide billions of dollars in cash claimed by the company’s units in the U.S., Canada and Europe. Creditors of each of the units have claimed differing amounts of the cash.

If Gross had rejected the interest rate settlement, the bondholders would have the right to press for $1.6 billion in interest. Gross would then be forced to decide what interest rate should be used to calculate the payments.

The bondholders argued they deserve the same rate they would get outside of bankruptcy. Some U.S. judges have ruled that when a bankruptcy starts, bondholders can collect only the so-called federal judgment rate, which is generally lower. In this case, the federal rate would give bondholders about $100 million, according to court records.

Investors who pressed for the interest included hedge funds that buy discounted debt from distressed companies and fight for a higher return in bankruptcy. Those funds include Aurelius Capital Management LP, Angelo Gordon & Co. and Centerbridge Partners LP, according to court papers.

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

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