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11.
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The security agreements that were entered into in connection with the December 2001 364-day syndicated credit facilities of Nortel
Networks and its subsidiary, NNI , provided for the granting of security in the event that Nortel Networks debt ratings fell below
investment grade. As of December 31, 2003, the security included pledges by Nortel Networks and NNIF&H B.V. of their shares of
Nortel Networks S.A. (see note 16).
The security became effective in the second quarter of 2002, following the downgrade by Moody’s Investors Services, Inc. (“Moody’s”)
of Nortel Networks senior long-term debt to below investment grade. At that time, the security became effective in respect of the
December 2001 364-day syndicated credit facilities, which have since expired, as well as any other credit facilities and public debt
securities of Nortel Networks which, by their terms, required that the security also apply to them. This included: the April 2002 364-day
revolving credit facilities of Nortel Networks and NNI, which were terminated in the fourth quarter of 2002; the April 2000 five year
syndicated credit facilities of Nortel Networks and NNI, which were terminated in the second quarter of 2004 (the “Five Year
Facilities”); Nortel Networks consolidated outstanding public debt securities; and Nortel Networks guarantee of NNC’s 4.25%
Convertible Senior Notes due September 1, 2008.
On February 14, 2003, Nortel Networks entered into an agreement with Export Development Canada (“EDC”) regarding arrangements to
provide for support, on a secured basis, of certain performance related obligations arising out of normal course business activities for the
benefit of Nortel Networks (the “EDC Support Facility”). On February 14, 2003, Nortel Networks obligations under the EDC Support
Facility became secured on an equal and ratable basis under the security agreements with the banks under the Five Year Facilities and the
public debt holders.
If Nortel Networks senior long-term debt rating by Moody’s returns to Baa2 (with a stable outlook) and its rating by Standard & Poor’s
returns to BBB (with a stable outlook), the security will be released in full. If both the Five Year Facilities and the EDC Support Facilities
are terminated, or expire, the security and guarantees will also be released in full (see note 16). Nortel Networks may provide EDC with
cash collateral in an amount equal to the total amount of its outstanding obligations and undrawn commitments and expenses under the
EDC Support Facility (or any other alternative collateral or arrangements acceptable to EDC) in lieu of the security provided under the
security agreements. Accordingly, if the EDC Support Facility is secured by cash or other alternate collateral or arrangements acceptable
to EDC and if the Five Year Facilities are terminated or expire, the security and guarantees will also be released in full for additional
information related to the security agreements, the termination of the pledges of the Five Year Facilities subsequent to December 31,
2003 (and the resulting termination by Nortel Networks and NNIF&H B.V. of their shares in Nortel Networks S.A., see note 16).
Receivables sales
In 2002 and 2001, Nortel Networks S.A. entered into various agreements to sell certain of its receivables. These receivables were sold at
a discount of
463 and 2,884 from book value for the years ended December 31, 2002 and 2001, respectively, at annualized discount
rates of approximately 3 percent to 4.5 percent and 5 percent to 6 percent for the years ended December 31, 2002 and 2001, respectively.
These programs were discontinued in 2002.
12. Guarantees
Nortel Networks S.A. has entered into agreements that contain features which meet the definition of a guarantee under FIN 45. FIN 45
defines a guarantee as a contract that contingently requires Nortel Networks S.A. to make payments (either in cash, financial instruments,
other assets, or through the provision of services) to a third party based on changes in an underlying economic characteristic (such as
interest rates or market value) that is related to an asset, a liability or an equity security of the guaranteed party or a third party’s failure to
perform under a specified agreement. A description of the major types of Nortel Networks S.A. outstanding guarantees as of
December 31, 2003 is provided below.
Nortel Networks S.A. has entered into an agreement to indemnify a certain lessor, through the term of the lease, which expires in
May 2013, against costs incurred as a result of changes in laws and regulations (including tax legislation) or in the interpretations of such
laws and regulations and/or as a result of losses from litigation that may be suffered by them or if the transaction becomes invalid. The
maximum amount that Nortel Networks may be required to pay if the transaction becomes invalid is approximately
76,457. The lease
pursuant to which the guarantee was provided is a capital lease and this liability is, therefore, part of the debt of Nortel Networks S.A.
The maximum potential losses resulting from the other types of lease guarantees cannot be reasonably estimated. The difficulties in
assessing the amount of liability result primarily from the unpredictability of the triggering events of the