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Avaya Gets Judge's Nod to Commence Voting

When Avaya filed for bankruptcy back on Jan. 11, its stated desire was to emerge from the process by the time summer came to a close. While that's no longer a possibility, an exit by year's end is within reason, John Sullivan, corporate treasurer, shared earlier today during a business update webcast.

This expectation comes with court approval of the amended disclosure statement Avaya filed earlier this month, as discussed at the time by industry watcher Sheila McGee-Smith, principal of McGee-Smith Analytics, in the post, "Avaya Takes Critical Next Step in Bankruptcy Process." The bankruptcy judge signed off on the revised disclosure statement last Friday, Aug. 25, allowing Avaya to commence the voting process on its bankruptcy plan, Sullivan said.

Voting deadline is Oct. 27, with a confirmation hearing set to take place on Nov. 15. An official exit typically takes place within two to three weeks of confirmation, so that would have Avaya out of bankruptcy late this November or early December, Sullivan said.

At the time Avaya filed its amended disclosure statement earlier this month, as noted in the above-mentioned post from McGee-Smith, Avaya had entered into a plan support agreement with a critical group of first lien debt holders and had arranged to transfer certain pension obligations to the Pension Benefit Guaranty Corporation (PBGC). Since then, Avaya has gotten the OK from the unsecured creditors committee, meaning it has attained agreement from three of the four major creditor groups to support its amended plan of reorganization.

The wild card is the second lien creditors, which by nature of a bankruptcy will probably be "taking most of the pain here because their recovery is going to be very small," Sullivan said. The second lien group has not pledged support of the agreement, and will likely "raise some noise," but Avaya attorneys don't believe these creditor are in much of a position to hold up the process, he added. (Last Friday, the judge rejected the second lien holders' request for remediation.)

Best case, Sullivan said, Avaya might tweak the plan to garner support from second lien creditors -- or the judge simply will impose the solution sans support from second lien holders.

Either way, Avaya's plan is to convert $6 billion in debt to equity, so debtholders end up owning the company. First lien creditors would own 91.5% of the company, and second lien creditors one percent, Sullivan said. The PBGC, which will take over the salaried pension plan, gets a 7.5% stake, as well as $350 million in cash. Nearly all participants (about 99%) in Avaya's qualified pension plan will receive the full value of their benefits under the deal, he added.

Avaya's debt does not entirely disappear under the current plan. As the plan stands now, when Avaya emerges from bankruptcy it will issue exit financing at an agreed amount of $2.9 billion, Sullivan said. "Now, while that might sound like a lot of debt, relative to the EBITDA we generate, it's a very sustainable amount of debt. In fact, we generate enough cash almost to pay that down in the next three to four years," Sullivan said.

The plan, he continued, is to have $350 million in cash -- the remainder of $2.9 billion will be disrupted to first lien creditors and to pay off the company's $750 million DIP loan. This is an appropriate capital structure for Avaya's emergence, he promised.

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