I'm an independent financial analyst.
Nortel was operating at a cost structure above what its revenues could support, and it's burning cash at the rate of $1 billion annually. All the figures I'm giving today are in U.S. dollars.
The financial crisis is causing a large drop in telecommunications equipment sales throughout the world, and Nortel, due to the uncertainty of whether it's liquidating or not, is having its revenues decline at a much greater rate than its peers in the industry.
I'd like to emphasize that Nortel chose to enter bankruptcy protection in January 2009 by missing a $107 million interest payment, despite the company having $2.5 billion of cash on its balance sheet. Nortel's next major principal repayment is not until 2011, when $1 billion of debt will need to be repaid. That, of course, is two years from now. We're dealing with much more stressful situations in other bankruptcies that already have debt repayments that cannot be refinanced.
Nortel management has indicated it has volunteered to enter bankruptcy protection to avoid paying severance. We don't have detailed estimates from the company, but on the assumption of the 5,000 jobs cut around the world, the estimated bill for severance would be approximately $500 million, of which we would anticipate Canada to be approximately $100 million, in U.S. dollars.
Under the current CCAA and BIA laws, it is correct that severance does not have preferred priority over unsecured creditors. I would like to note, however, that it is prevalently the case that numerous companies that have filed for CCA protection enter in the beginning days of the process to seek approval from the judge for the payment of severance. In this case, they have chosen not to do that and they have said the purpose of the filing was not to pay severance in order, as we heard many times today, to optimize the value of Nortel--“we need to pay bonuses to the current employees to preserve the value of Nortel”. Obviously, severance and making special contributions in order to top up the pension fund deficit is, in his mind--Mr. Zafirovski, for respect--depleting value for the estate. From my perspective, those statements of optimizing value have a lot to do with maximizing the value for the bondholders by not paying the severance and the pension fund deficits around the world.
Indeed, Nortel is definitely technically bankrupt. The value of the assets on the pending sales, as in the early stages of ongoing concern, are considerably less than the estimated $11 billion of claims. I've estimated, based on what we can find from the updated actuarial reports, that the employment-related claims in the world are approximately $5 billion. So half the creditor claims that are currently being sought for compromise are in the employment-related field: severance, disability, pension fund deficits, not only in Canada but in the rest of the world.
After listening to the presentation of management earlier today, it's very clear to me that they are no longer vigorously pursuing Nortel as an ongoing concern. All the phrases are “I tried to rectify the company”, “I really believed in the turnaround”. These are all in the past tense.
This group, both the terminated employees and the retirees, would like to have an ongoing concern to better enable the payment of the pension fund deficits. And more importantly, they would like to have an ongoing concern to provide research and development jobs in our country for the children of the retirees, the engineering graduates, the mathematics graduates, the physics graduates, and so on, so they could have gainful employment in their pursuit of innovation within Canada and not have to go to the research and development centres of the foreign buyers of the Nortel businesses.
I'd like to note that it is erroneous for the government to say it is reluctant to intervene in the provincial jurisdictions for severance and pension benefits standards. The federal government administers the Companies' Creditors Arrangement Act and the Bankruptcy and Insolvency Act. I don't have time today to go into all the details of this, but I urge everyone to examine the Court of Appeal of Ontario case by Justice Farley. When the Superintendent of Financial Services of Ontario asked his court to approve the special contributions in order to replace the deficit of the Ivaco pension plan, he turned down the request--even though that would have been in the normal course of provincial legislation--on the premise that Ivaco would be liquidating, and under the BIA the pension deficits and the special contributions were pari passu with the unsecured claims. He was unwilling to execute the protections that were in the Ontario Pension Benefits Act.
For this reason, and as a result of what we have heard today about the premise for not paying the employment-related claims in the Nortel case, we ask for an emergency amendment of the Bankruptcy and Insolvency Act to give super-priority to the severance and pension deficits over the bondholders and the unsecured suppliers in this situation.
A statement was made that there were no secured creditors in this company. I'd like to note that $200 million of debtor-in-possession financing—non-arm's-length financing--has come up from the United States. It has been granted super-priority status with respect to the cash disbursements that will come from the sale of assets by Nortel. It is a Canadian-based company, although there are multiple subsidiaries in multiple areas of the world that have their own legal corporations and their own specific indentures and considerations.
A point was made Don Sproule, the head of the retirees protection committee, that Canada is in a particularly precarious situation. Even though Nortel has a 115-year history and is the Canadian base of operations for half of the research and development of Nortel in the world, it is primarily a cost centre. This is typical of a number of successful international companies.
Due to the inter-corporate transactions between Canada and the U.S. on internal transfer pricing agreements, inter-corporate loans, and so on, it is our firm belief that unless there is government intervention there will be limited cash from the disbursements of the sales of Nortel available for provision of top-ups to the pension plan and severance--so much so that we could have nothing in Canada, or perhaps ten cents on the dollar.
I think it is very optimistic at this point, based on the inter-corporate transactions without intervention by the CEO of the company, to disband with internal contracts to ensure that the appropriate amount of money is dedicated for the payment of the pension deficit.