Analyst: Early Nortel bankruptcy might be smart

It might make sense for Nortel to declare bankruptcy sooner rather than later in an effort to be in as strong a position as possible when it happens, an industry financial analyst says.

Under the heading "Nortel: January bankruptcy filing?" UBS analyst Nikos Theodosopoulos suggests that declaring bankruptcy first thing next year "may make sense to maximize franchise value."

The global economic recession in conjunction with looming debt payments don’t make for a promising 2009 for the company, which is already reported to have hired advice about declaring bankruptcy, Theodosopoulos says in an e-mail newsletter.

Nortel has an interest payment on debt due Jan. 15 between $100 million and $120 million, and he thinks executives may decide to forego paying it as the better choice long-term.

The company had a tough time in the fourth quarter, the analyst says, following a $3.4 billion net loss in the third quarter. It’s stock price today was 26 cents per share, and the company faces delisting from the New York Stock Exchange if it doesn’t rise.

As time goes by, it may become more difficult for companies declaring bankruptcy to find financing to do so, Theodosopoulos notes. All that adds up to a hard decision.

"We believe a likely challenging 4Q08, weakening 09 outlook and tightening DIP financing may cause Nortel to withhold its interest payment and possibly pursue an early bankruptcy," he says.

Matters could become more complicated if Nortel has trouble finding a buyer for its metro Ethernet networking division and if it has trouble obtaining assistance from the Canadian government, he says.