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Avaya Takes a Step, Not a Leap: Page 2 of 2

Continued from Page 1

Because of these factors and Kennedy's statement, getting an agreement and plan approval at the requested June 27 hearing is not a slam dunk. Clearly the plan is weighted to the first position creditors; they have a large voting interest to approve the plan and the court may agree that this plan is the best overall outcome.

Seeking Concensus

However, as in any bankruptcy, other factors will come into play and if Avaya had a consensus from the stakeholders already, surely that would have been referenced in the announcement. Even in his official comments, Kennedy indicated reaching a consensus could take weeks or even months. This could lead one to conclude that Avaya has put this proposed plan as a stake in the ground, and that if it cannot reach a consensus then the probability of a continuation of the process or a more negative outcome increases.

That said, prior to the Chapter 11 filing, Goldman Sachs, which Avaya had retained to find a buyer, had not been successful in doing so, neither for Avaya in its entirety nor for the contact center business, at a required price/terms. Therefore, most, if not all, of the secured creditors may see liquidation as having lower value than supporting the ongoing business as defined in the plan. If a consensus doesn't develop by June 27, the court can decide to rule that the plan protects the interests of the secured creditors best, and so approve it. If the court does not approve the plan, then Avaya and the court will have two options: continue to take more time to develop consensus, or move to an asset liquidation process.

Hopefully, Avaya can quickly gain consensus so the court can approve the plan or a derivative on June 27. Waiting 10 weeks for approval/announcement is not desirable if there is an agreement with all stakeholders to the plan. Announcing consensus and agreement of the stakeholders prior to June 27 would demonstrate that the plan is acceptable to the creditors and the hearing is more of a formality. For example, in its bankruptcy, Aspect filed its plan and the hearing to approve it followed very quickly in the process as the parties had agreed in advance and no counter actions came up during the hearing.

However, it is unlikely that the second position lien holders will agree to the proposed plan, so a decision will probably be left up to the court. The first position creditors will have to decide if the plan is an adequate value for their bonds. This requires weighing the uncertainty of the future value of Avaya as an ongoing business versus the risk of a liquidation.

As they become the "owners" of Avaya, the long-term business outlook is critical to this decision. If the first position lien holders conclude that the proposed plan is their best option, they will support the plan... unless they have second positions to protect. The court will have to agree that the rights and interests of the first position lien holders and the pension plans/PBGC are most important and best served by impacting the second position lien holders and other unsecured creditors as this plan proposes.

The second lien holders may try to convince the court there are other options that are not so impactful on their positions or that an alternative allocation of assets is better or fairer. This suggests that the outcome will not be clear until after the hearing on June 27. In fact, the court may well take the arguments at that time and then wait before ruling or even asking for more hearings.

The actual filing of a proposed plan as well as the requesting of a hearing date does set a clear timeline for the next step in the process. If the plan receives approval at the June 27 hearing, Avaya will move forward to complete the restructuring and exit the bankruptcy process. While it will need to complete a number of other steps in the process, Avaya could be on a path to emerge as a reorganized entity as early as August or September or as late as October.

Course Correction

Even if the court delays on a ruling or schedules additional hearings, if the plan receives its approval, there is a high probability that once the plan is approved Avaya will emerge from its reorganization, sans the networking business, as an intact corporate entity. The next challenge would then be re-structuring the actual business and the management team to correct the downward spiral of the last few years. While the current management team has done admirable work in managing the profitability of the ongoing business through cost cutting, price increases, and margin improvements, the underlying challenge of decreasing revenue and installed base erosion remains. This next focus for both the management team and the new owners will be critical as both the revenue and customer impact of the bankruptcy will continue even after the actual process completes. (See my related No Jitter article for a discussion of the options for a strategy to change the Avaya path beyond the simple capital restructuring.)

For Avaya customers and partners, last week's announcement was certainly a light in the tunnel, but without the clarity that it is actually the end of the tunnel. While Avaya met its most recent goal of having a reorganization plan by the middle of April, the fact that the plan has not reached a consensus of support among creditors casts doubt on whether the light is the nirvana of a reorganized Avaya with much lower debt or the potential locomotive of liquidation. Unfortunately for all of us looking for closure on the Avaya bankruptcy process, we are all put into the wait-and-see mode for another 10 weeks.