Nortel bankruptcy is possible, analyst says

TORONTO (Reuters) - Nortel Networks Corp NT.TO NT.N, North America's biggest maker of telephone equipment, will have to rely on asset sales to fund its battered operations, and risks running out of money and collapsing under its debt load before 2011, an analyst warned on Thursday.

"Considering the worsening macro environment, Nortel's challenged industry position, and concerns related to liquidity while the capital markets are basically closed, we think bankruptcy is a distinct possibility down the road," RBC Capital Markets analyst Mark Sue wrote in a note.

Sue, who also cut his target price on the shares to zero, made the remarks days after Nortel posted a $3.4 billion loss and announced another round of sweeping cost cuts that included 1,300 layoffs, or about 5 percent of its 30,000-strong work force.

The Toronto-based company is also trying to sell its Metro Ethernet Networks unit, which includes its optical and carrier ethernet technology, but has thus far been unable to find a buyer.

"Assets sales couldn't have come at a worse time, and due to Nortel's distressed situation, potential bidders for the company's Metro Ethernet assets may offer subsequently distressed prices," Sue wrote.

He also estimated Nortel could face a pension deficit of as much as $2.8 billion because of the downturn in global stock markets.

"Our cash-flow analysis points to an increasingly challenging outlook," Sue said. "Without government intervention or major financial sponsors, Nortel may run of out cash before its $1 billion 2011 bonds mature."

The company has lost billions of dollars and cut tens of thousands of jobs since the technology bubble burst at the beginning of this decade. It has never recovered since then, unable to post a steady profit and forced to contend with stiff competition and slumping demand for the gear that it makes.

"Cost reduction and cash preservation are priorities -- both to stabilize our financial footing as well as to provide funds for growth investments," said Nortel spokesman Mohammed Nakhooda on Thursday.

"We are moving forward in a determined fashion, and have carved a clear plan forward to strengthen our financial footing."

Nortel shares were up 10 Canadian cents to 79 Canadian cents on the Toronto Stock Exchange on Thursday. In mid-2000, they were worth more than C$1,100 each, adjusted for a stock consolidation that took place in late 2006.

($1=$1.23 Canadian)

(Reporting by Wojtek Dabrowski; editing by Frank McGurty)