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Financial

Nortel Preps for Financial Update

Tomorrow morning, Nortel Networks Ltd. (NYSE/Toronto: NT) will provide the first of a series of biweekly business updates demanded by the Ontario Securities Commission.

Nortel said last month it would provide updates on "the affairs of the company" every two weeks to satisfy the requirements of the Canadian regulator. The OSC demanded the regular updates when it prohibited trading in Nortel stock by more than 160 senior staff and other current and former employees, including new board director John Manley. That order followed the OSC's announcement of a probe into Nortel's financial reporting (see Nortel Insider Trading Halted, Nortel Hires a Statesman, and Canadian Regulator Probes Nortel).

It's not clear exactly what the report will cover or whether any update concerning Nortel's anticipated financial restatements will be included. A Nortel spokesman said he "couldn't speculate" about the report's contents (see SEC Pops In on Nortel and Nortel Gets Federal Subpoena).

Things could be worse for Nortel, though. The Canadian government agency Export Development Canada has allowed it access to the $750 million credit facility used to help secure deals with customers outside Canada. The availability of the funds had been in doubt since Nortel announced it was under investigation by the U.S. Securities and Exchange Commission (SEC) (see Nortel Gets EDC Waiver). But it's not just business as usual: The conditions surrounding the financial facility have been tightened, and the EDC will now review Nortel's use of the fund on a case-by-case basis. Nortel says there's no guarantee it will receive any further EDC funds.

The EDC will review the situation again either on July 30 or August 30, or even earlier if Nortel files its restated accounts for 2003 and the first quarter of 2004 before those dates. Nortel's share price was down by two cents at $3.81 in pre-market trading today, following the holiday weekend break.

— Ray Le Maistre, International Editor, Boardwatch

No-tell 12/5/2012 | 1:40:26 AM
re: Nortel Preps for Financial Update The EDC credit facility is in place to help Nortel with performance bonds. Essentially, the more shaky a supplier is, the more likely customers are to require performance bonds. These bonds compensate customers if suppliers are unable to complete work as agreed. These are more common outside the US.

You can get an idea of how much business is backed by performance bonds by looking at the reported "restricted cash" balance in Nortel's balance sheet (assuming we ever seen one again any time soon).

Note that Nortel didn't really have to use these much until the last year or two, when Nortel's long-term viability came into question. Now that viability is again questionable, you may expect to see an increase in the restricted cash balance...and therefore greater importance of the EDC facility.
stephenpcooke 12/5/2012 | 1:40:25 AM
re: Nortel Preps for Financial Update No-tell,

As a consultant I had my own company and I regularly did a bunch of work for non-Canadian companies (US, UK). I keep getting EDC (Export Development Canada) flyers every other week. Perhaps your understanding of their function is different than mine or they offer many more things to huge companies than just us small guys (most likely true) but they are presented in their literature as being an insurer of foreign revenue sources. For example, if I gave 30-day terms to a client in Brazil and I insured those charges via the EDC, I could get a low interest loan on that money instantly because it was insured by the Canadian government.

I may be quite wrong on this but with the number of carriers going out of business, the amount of non-Canadian business that Nortel does, the payment terms that Nortel has to offer, etc. this would seem to make sense that they would now choose to avail themselves of this facility where before it may have been a needless expense.

I can't say one way or the other.
brtechy 12/5/2012 | 1:39:08 AM
re: Nortel Preps for Financial Update Stephen,

You're right when it comes to the primary reason for using EDC - which is basically obtaining insurance for low interest rate loans to foreign companies.

The EDC insurance (and sometimes direct loans) comes into place when competing with the likes of Siemens, Alcatel and Ericsson (and lately even Huawei), which all can offer low rate loans to service providers outside the US based on conditions supported by their respective ECAs (Export Credit Agencies). In Brazil, for instance, both Siemens and Ericsson have come up recently with huge loans to telcos that sit around the Libor+2 rate for a 4 year term. When compared to market rates for the same risk (at around Libor+3 or higher), this ends up representing a much sought after advantage in closing large deals where long-term financing is a requirement.

brtechy
joe_average 12/5/2012 | 1:39:06 AM
re: Nortel Preps for Financial Update EDC is really a way of the government, in this case the Canadian gouvernment, to subsidize companies.

In other words, it isn't "Vendor Financing" but rather it is a form of "Tax Payer Financing". A lousy deal for the Canadian (or US or French or German etc.) tax payer. The WTO should outlaw the practice. (But then again, I think that the US Congress should outlaw the practice of wasting city tax dollars to lure multi-billion dollar owners of sports team so that they can pay their multi-million dollar athletes.)
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