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Avaya Bankruptcy: Hearing on Reorganization Plan Delayed

Avaya is due in bankruptcy court today, May 25, as scheduled -- but the slated actions are not exactly what we expected a month ago.

The court today is set to review the Extreme Networks bid for Avaya networking business, and potentially approve the sale. With Avaya having received only this one bid, one would assume the court will award the data networking business to Extreme. One sticking point, however, could be an objection from Oracle, which opposes the sale due to the transfer of licenses. (A second company, Mentor Graphics, had also opposed the sale for the same reason, but that objection had been removed late last week.)

The other big event scheduled for May 25 had been a hearing for the formal presentation of management's reorganization plan to the court. This disclosure statement hearing was to start a clock to get votes for approving the plan by June 27, as I'd earlier written in the post, "Avaya Takes a Step, Not a Leap." The company has asked to move the disclosure statement hearing back to June 29 with the following statement:

    "Avaya and our major stakeholders have jointly determined that a one-month adjournment of the disclosure statement hearing is in the best interest of all stakeholders as we continue working toward a consensual conclusion of the restructuring process. At the request of our major creditor groups, we have adjourned the hearing in order to continue productive discussions around the terms of Avaya's ultimate restructuring. We remain committed to completing the restructuring process as quickly as possible. We continue to anticipate emerging from chapter 11 as early as the summer of 2017."

The intent of the disclosure statement hearing is to have the bankruptcy court review Avaya's disclosures and authorize the company to start soliciting votes for the plan of reorganization. Assuming a month for finalization after a June 29 disclosure hearing, the earliest a vote on the plan could take place would be late July. Even if the Avaya reorganization plan is approved at that time, the company would not likely be able to exit the bankruptcy process until late September or October. Between plan approval and exit from bankruptcy come numerous process steps, potentially including securing new bond commitments.

The delay signals that Avaya bondholders, which as I noted in the above-mentioned article will be looking to maximize what they recover, are reticent to approve the management plan as it stands. According to documents filed with the SEC this week, as of May 16 Avaya has entered into separate confidentiality agreements with certain members of an ad hoc group consisting of some first and second lien creditors ("Ad Hoc Crossholder Group"). These may be the bondholders that have both first and second position bonds and may be proposing a different allocation of the cash and equity of the company than that in the Avaya management proposal. The negotiation between the creditors appears to be an issue; there seems to be two proposals on the table, and the goal is to negotiate a deal.

This allocation, along with the evaluation of the current and future value of the company and the general management oversight structure of the company post-reorganization, are challenges that have extended the time to reach an restructuring agreement with the creditors. As I wrote earlier and will repeat here, the outcome of the Avaya bankruptcy process is still a waiting game, now extended into at least August for a clear answer.

It remains to be seen if the creditors will accept the plan or force a more drastic set of asset sale actions. If the Avaya management team and the creditors cannot agree on a reorganization plan soon, the prospects of an intact exit will decrease significantly.