U.S. Bankruptcy Judge Calls Temporary Truce on Nortel Bond Interest ...

A U.S. bankruptcy judge has called a temporary truce in a fight between Nortel Networks Corp.’s U.S. division and the Canadian parent company over a $1 billion settlement with bondholders.

Judge Kevin Gross pushed off until October a planned September showdown over the settlement, which has to do with how much interest is owing on some $4 billion in bond debt issued by the former Canadian technology icon.

The date has not been settled. However, whatever date is chosen, the judge wants the combatants in his chambers the evening before where they will be subjected to “a little bit of pressure.”

Known for his skills as a mediator, Judge Gross has presided for more than five years over Nortel’s U.S. bankruptcy, part of an international insolvency that has proven impervious to peacemaking efforts.

Three failed mediations over how to divide $7.3 billion in cash preceded a lengthy trial that ended in June and awaits a decision. When the trial closed, the U.S. division said in court papers it would engage in renewed settlement talks aimed at resolving the international wrangle over the money.

That has not happened. “In fact there aren’t discussions going on now,” Lisa Schweitzer, lawyer for the U.S. division, told Judge Gross Friday at a court hearing.

Settlement talks “should be taking place,” the judge said, summoning the parties to a chambers conference the evening before the bond interest rate settlement is presented for review in the U.S. Bankruptcy Court in Wilmington, Del.

The settlement slated for review in October is not a resolution of the $7.3 billion cash fight. It’s a U.S.-only pact involving the bond interest rate, with the U.S. division of the long-dead company on one side, and bondholders on the other.

Nortel Canada has been left out in the cold by the bond interest settlement, which could drain the cash the Canadian company is counting on to cushion the blow of the company’s collapse on non-U.S. creditors. Cuts in income and benefits, some of them severe, befell Nortel’s British and Canadian retirees and disabled workers.

Nortel Canada and its creditors contend bondholders are owed only about $90 million in interest.

The U.S. division says the agreement to pay $1 billion interest is a good deal, as bondholders claim they’re entitled to $1.6 billion and willing to chase the money through the courts for years.

It’s “an issue that could be litigated and could be litigated for a long time,” said Ms. Schweitzer.

Nortel Canada says the settlement is a sham. “There’s not so much a settlement as there is a complete victory for the bonds,” said Daniel Guyder, lawyer for Ernst & Young, which serves as monitor in Nortel’s Canadian insolvency proceeding.

Unveiled the evening before Nortel Canada was due to face off in court against the U.S. division over the proper rate of interest, the settlement will ensure profits for distressed debt investors who pounced on Nortel’s bonds after it collapsed in 2009.

If the settlement goes through, debt acquired at a discount could be paid in full, with $1 billion interest, assuming the U.S. division wins enough of the cash in the allocation fight to cover the debt.

Write to Peg Brickley at [email protected].