Phil Edholm
Phil Edholm is the President and Founder of PKE Consulting, which consults to end users and vendors in the communications...
Read Full Bio >>

Phil Edholm | April 19, 2017 |


Avaya Takes a Step, Not a Leap

Avaya Takes a Step, Not a Leap The company's proposed plan of reorganization shows forward progress, but this is still a waiting game.

The company's proposed plan of reorganization shows forward progress, but this is still a waiting game.

Last Friday, April 14, Avaya announced that it had filed with the court a Chapter 11 proposed plan of reorganization, which specifies how the company would be structured after bankruptcy and how the creditors in the bankruptcy would receive value for their positions (see related No Jitter article). Now what?

As next steps, Avaya is scheduled to present the proposed plan at a hearing on May 25, at which time the judge will review the plan for completeness and understanding. On June 27, the bankruptcy court is scheduled to hold a hearing to review the plan and hear arguments as to why or why not it should accept the plan.

Companies typically follow one of two paths to the end of a bankruptcy and debt relief: They either reorganize or liquidate (sell assets as Nortel did). Clearly, the Avaya team has a strong desire to reorganize and continue as a complete company (less the networking group), and has proposed a plan that accomplishes that.

As part of this proposed plan, in a press release, Avaya stated the following general terms:

  • Pre-filing debt will be reduced by more than $4 billion
  • Restructuring will be achieved through a debt-for-equity exchange in which certain secured creditors would acquire 100% of the equity in a reorganized Avaya
  • General unsecured creditors will share pro rata in a cash pool
  • Qualified U.S. pension plans, which make up the vast majority of Avaya's pension obligations, will be honored and maintained following emergence from bankruptcy
  • Its two collective bargaining agreements and all related agreements will be honored and assumed

This follows the general structure I've discussed in my previous No Jitter articles on Avaya's bankruptcy, but Avaya may face a challenge on some key points.

For example, an official statement provided with the announcement from Avaya CEO Kevin Kennedy suggests that things are still fluid: "We look forward to working closely with all stakeholders over the coming weeks and months to refine the Plan and build consensus." This statement raises a critical question as to whether Avaya has the required creditor support and agreement to the plan as proposed. This is probably because the plan, as proposed, is heavily weighted to the secured creditors and the pension funds.

One interesting point in the proposed plan description document is the value of Avaya (called HoldCo in some of the documents) after bankruptcy, as assessed by advisory firm Centerview Partners. As stated in the plan disclosure:

    "...for purposes of the Plan, Centerview estimates that the Enterprise Value including IP of the Avaya Enterprise falls within a range from approximately $5.1 billion to approximately $7.1 billion, with a midpoint estimate of approximately $6.1 billion, which consists of the value of the Avaya Enterprise's operations on a going-concern basis plus the value of intellectual property." The document goes on to say, "Based on assumed debt at emergence (from the reorganization) of $2.0 billion, cash of $350 million, capital leases of $31 million and tax-effected pension and OPEB liabilities of $1.1 billion, and after application of the settlements and compromises set forth in Article III of the Disclosure Statement, the implied range of value for the Reorganized HoldCo (Avaya) Common Stock is approximately $2.3 billion to approximately $4.3 billion, with a midpoint estimate of approximately $3.3 billion."

This indicates the common stock/equity value of the reorganized Avaya is approximately $3.3 billion. The intent of the proposed plan is that this will be distributed to the current bondholders.

In any bankruptcy, creditors hold relative "positions," with first position creditors generally paid in full before second or subsequent positions receive payment. The proposed Avaya reorganization plan treats the bondholder positions significantly differently. In the proposed plan, the cash flow credit facility secured claims and the first lien notes secured claims are both in a secured first position, and together will receive 95% of the equity in the reorganized company and more than $1.4 billion in cash. The second lien holders, while secured, are in second position and will receive no cash and 5% of the equity in the reorganized company.

In the plan disclosure document, the first position is shown at 100.4% estimated recovery, while the second is shown at 11.4% recovery. Clearly the plan is weighted to assuring the first position lien holders recover close to their value while the second position bondholders receive much less. The second position bondholders held about 23% of the debt of the company. One of the challenges to a consensus I have heard mentioned is that some of the first position lien holders also hold second position liens and they may vote/argue against the plan due to the impact on their second lien positions.

Lastly, any unsecured creditors will receive about 10 cents on the dollar of the obligations they hold. However, it is not clear if many such creditors exist. As I understand, Avaya is managing most (potentially all) of the ongoing business obligations through critical supplier payments to assure the business continues to operate normally.

In addition, there have been indications that some of the creditors feel the pension liability should be included in the capital restructuring as part of the final plan. They feel that maintaining the full pension liability while reducing the treatment value of the bondholders is not fair. However, including the pension liability would dramatically complicate the bankruptcy as the Pension Benefit Guaranty Corp. (PBGC) is structured to receive cash, not equity.

Click below to continue to Page 2


April 19, 2017

Now more than ever, enterprise contact centers have a unique opportunity to lead the way towards complete, digital transformation. Moving your contact center to the cloud is a starting point, quick

April 5, 2017

Its no secret that the cloud offers significant benefits to enterprises - including cost reduction, scalability, higher efficiency, and more flexibility. If your phone system and contact center are

March 22, 2017

As today's competitive business environments push workforces into overdrive, many enterprises are seeking ways of streamlining workflows while optimizing productivity, business agility, and speed.

April 28, 2017
Change isn't easy, but it is necessary. Tune in for advice and perspective from Zeus Kerravala, co-author of a "Digital Transformation for Dummies" special edition.
April 20, 2017
Robin Gareiss, president of Nemertes Research, shares insight gleaned from the firm's 12th annual UCC Total Cost of Operations study.
March 23, 2017
Tim Banting, of Current Analysis, gives us a peek into what the next three years will bring in advance of his Enterprise Connect session exploring the question: Will there be a new model for enterpris....
March 15, 2017
Andrew Prokop, communications evangelist with Arrow Systems Integration, discusses the evolving role of the all-important session border controller.
March 9, 2017
Organizer Alan Quayle gives us the lowdown on programmable communications and all you need to know about participating in this pre-Enterprise Connect hackathon.
March 3, 2017
From protecting against new vulnerabilities to keeping security assessments up to date, security consultant Mark Collier shares tips on how best to protect your UC systems.
February 24, 2017
UC analyst Blair Pleasant sorts through the myriad cloud architectural models underlying UCaaS and CCaaS offerings, and explains why knowing the differences matter.
February 17, 2017
From the most basics of basics to the hidden gotchas, UC consultant Melissa Swartz helps demystify the complex world of SIP trunking.
February 7, 2017
UC&C consultant Kevin Kieller, a partner at enableUC, shares pointers for making the right architectural choices for your Skype for Business deployment.
February 1, 2017
Elka Popova, a Frost & Sullivan program director, shares a status report on the UCaaS market today and offers her perspective on what large enterprises need before committing to UC in the cloud.
January 26, 2017
Andrew Davis, co-founder of Wainhouse Research and chair of the Video track at Enterprise Connect 2017, sorts through the myriad cloud video service options and shares how to tell if your choice is en....
January 23, 2017
Sheila McGee-Smith, Contact Center/Customer Experience track chair for Enterprise Connect 2017, tells us what we need to know about the role cloud software is playing in contact centers today.