2012 Olympics backer Nortel files for bankruptcy protection

Nortel, the Canadian telecommunications equipment giant and one of the cornerstone sponsors of the 2012 London Olympics, has filed for bankruptcy protection in both the US and Canada as it struggles to cope with the effects of the economic recession and plunging demand for its products.

Based in Toronto and still ranked as the biggest maker of telephone equipment in North America, Nortel said the move was designed to give it breathing space to deal with the deteriorated environment in which it finds itself. The conglomerate said its European units would shortly be making similar creditor protection filings.

Not everyone in Canada's financial community was surprised by the dramatic move. "It's the end of a saga," Benoit Lalonde, of Laurentian Bank Securities, told the Bloomberg news agency. "Nortel is a corpse awaiting burial. I'm sad to see it happen but the tears were shed many months ago."

The filing came as the company faced new interest payment deadlines on its debt, though it said that it still had $2.4bn (£1.6bn) in cash reserves. Richard Windsor, of Nomura bank, said Nortel might have been able to "stumble along for about a year or two" without seeking protection. He added: "This action has not been forced. The idea is to do something decisive rather than be broken up and sold off at extremely distressed valuations."

The consequences for the London Games were not clear. "We are aware of the situation and working through it with Nortel," London 2012 organisers said in a statement.

With its partner in the UK, British Telecom, Nortel has stepped forward as a so-called "Tier One" sponsor of the Olympics, pledging to provide $58m in cash and provide the telecommunications infrastructure, including secure networks, local wireless networks, a call centre and fixed telephony infrastructure. Nortel, along with Bell Canada, is also the main supplier to the 2010 Winter Games in Vancouver.

Yesterday's bankruptcy filings also sent a chill all across the economic landscape of Canada as the markets saw it as the most dramatic indicator yet of the country's slide into a recession as harsh as the one gripping the United States south of the border.

For years, Nortel stood as a beacon of innovation and success in Canadian business, rather like Research in Motion, the maker of the BlackBerry line of mobile devices, does today. At the end of the dot.com boom of the late Nineties it had expanded to the point where its market capitalisation was equal to half the gross domestic product of Mexico.

Since those heady days, the company has struggled with a slow decline as customers have defected to rivals like Cisco and Juniper Networks. The company also faced turmoil when some investors filed suit against it for alleged manipulation of its accounts. Last year, Canadian police charged two of its former top executives with fraud for allegedly fiddling the company's books in 2002 and 2003.

The job of rescuing the company, founded as Northern Electric and Manufacturing in 1895 and produced the first dial telephones in Canada, was given to the current CEO, Mike Zafirovski, in 2005, who quickly embarked on a programme of restructuring that included a heavy round of lay-offs. Yesterday he defended the bankruptcy decision. "Nortel must be put on a sound financial footing once and for all," he said. "These actions are imperative so that Nortel can build on its core strengths."

Nortel insisted that, with its large cash reserves, it would continue to operate as normal.