Nortel Exploring Bankruptcy-Court Protection

Nortel Networks Corp. (NT), is seeking legal advice to study a bankruptcy-court protection scenario in the event that its restructuring plan fails, the Wall Street Journal reported.

The Toronto-based company has also been exploring the possibility of getting assistance from the Canadian government. However, last week’s shut down of the Canadian parliament by Prime Minister Stephen Harper, is clouding those prospects.

From the Journal:

Ronald Alepian, a spokesman for Nortel, said that “no bankruptcy filing is imminent,” but added that the company has engaged several advisers to help it chart a way forward. “We remain focused on carrying out the restructuring we outlined on Nov. 10 to cut costs,” he said.

Nortel, Canada’s biggest maker of telephone equipment is currently facing significant liquidity concerns caused primarily by a sudden drop in contracts by U.S. carriers, prompting the company’s cash engine to choke off.

The Toronto-based Nortel burned through $478 million in cash during the first three quarters of this year, as sales of the co.’s CDMA technology diminished. Uncertainty surrounding the co.’s finances has obviously limited its ability to find new business. While Nortel has $2.6 billion in cash, the company is overwhelmed by a hefty cash burn rate and debt. In addition, the macro environment continues to deteriorate.

RBC Capital Markets analyst Mark Sue noted in November that Nortel began 2008 with $3.2-billion in cash but has had negative free cash flow of more than $600 million year-to-date. Sue also pointed out that the company faced significant liquidity concerns, with bankruptcy a distinct possibility before 2011.

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