AVYA - Avaya Wipes Out Shareholders In Bankruptcy

Summary

• After protracted negotiations with creditors, ailing digital communications solutions provider Avaya finally filed for bankruptcy on Tuesday.
• Company has secured almost $780 million in new capital commitments from existing lenders and a bank syndicate led by Citigroup.
• Strategic partner RingCentral takes a major hit as $125 million in Convertible Preferred Shares are getting cancelled in bankruptcy.
• As predicted by me months ago already, common equity holders will be wiped out.
• With Avaya expected to emerge as a private entity within the next 60 to 90 days, common shareholders should sell their holdings and move on as soon as the stock commences trading on the Pink Sheets later this week.

After protracted negotiations with creditors, ailing digital communications solutions provider Avaya ( AVYA ) finally filed for bankruptcy on Tuesday.

As the restructuring support agreement has been signed by more than 90% of the company's secured lenders, implementation should go swiftly with Avaya expected to emerge as a private company within the next 60 to 90 days.

Completing the Financial Restructuring will reduce the Company’s total debt by more than 75%, from approximately $3.4 billion today to approximately $800 million. Additionally, it will substantially increase Avaya’s cash and strengthen its liquidity position, resulting in an expected emergence balance sheet with less than 1x net leverage.

The company has received commitments for an aggregate $628 million in debtor-in-possession (“DIP”) financing, including a new $500 million term loan facility from secured creditors Apollo Global Management ( APO ) and Brigade Capital Management, among others.

In addition, a bank syndicate led by Citigroup ( C ) will provide a new $128 million asset-based lending ("ABL") facility.

Following completion of the restructuring, both loans will be rolled into exit facilities.

Moreover, a number of secured creditors have agreed to backstop a $150 million rights offering at exit.

In aggregate, Avaya has secured almost $780 million in new capital which together with cash on hand and cash generated from operating activities, is expected to provide substantial liquidity to support the company during the restructuring process and beyond.

Lastly, the company has restructured its strategic partnership with RingCentral ( RNG ) with RingCentral's $125 million in the company's 3% Series A Convertible Preferred Shares being cancelled:

Avaya will continue to act as the exclusive sales agent for direct and partner sales of Avaya Cloud Office, Avaya’s exclusive multi-tenanted cloud PBX solution, in the geographies where it is available. The partnership has also expanded to include additional go-to-market constructs that enable Avaya to sell Avaya Cloud Office to its installed base on a direct basis. In addition, Avaya will be compensated in cash as Avaya Cloud Office seats are sold and, in connection with the Financial Restructuring, RingCentral’s preferred stock in Avaya will be eliminated.

As predicted by me for some time already, common equity holders will be wiped out at the end of the restructuring process as clearly stated in the company's Public Equity Investors FAQ :

Existing equity holders should note that the NYSE is expected to commence delisting proceedings with the common shares likely to start trading on the Pink Sheets on Wednesday or later this week.

Please note that investors with short positions in the common shares won't be required to cover.

Bottom Line

Not surprisingly, Avaya is handing over ownership of the ailing company to secured creditors in bankruptcy to reduce debt and get access to additional liquidity.

With Avaya expected to emerge as a private entity within the next 60 to 90 days, common shareholders should sell their holdings and move on as soon as the stock commences trading on the Pink Sheets later this week.

For further details see: