Wait a minute… Six weeks ago, Goldman Sachs and JP Morgan convinced investors to buy $600 million in new debt.
By Wolf Richter for WOLF STREET.
This is not a recent IPO or a now collapsing SPAC merger, but a legendary telecommunications, software and services company that has become a Wall Street enrichment device. at the expense of investors time and time again over the past 20 plus years.
Avaya was created by telecommunications equipment giant Lucent Technologies at the end of the dotcom bubble. Lucent was spun off by AT&T in 1996, exploded during the dot.com bubble, and collapsed during the internet crash. Avaya was acquired in 2007 by private equity firms TPG and Silver Lake and went into debt to repay rich gains to them. In 2009, Avaya acquired collapsed telecommunications giant Nortel.
In January 2017, crippled by debt, Avaya filed for Chapter 11 bankruptcy. In December 2017, Avaya emerged from bankruptcy and its new shares began trading at the time.
“This is the start of an important new chapter for Avaya,” CEO Jim Chirico said at the time. More on him in a moment.
These are the new actions we are talking about.
This morning, the company confirmed the previously warned drop in revenue and a gigantic loss of 2.4 times the size of its revenue. In addition, he disclosed an investigation into his financial reports. And he warned that he may not be able to repay his obligations due in June 2023, despite having just raised $600 million by selling new debt in order to repay those obligations, and as a result of all of this, “there is substantial doubt about the Company’s ability to continue as a going concern.
So he’s a candidate for bankruptcy. If he files for bankruptcy, it would be the second time.
The already imploded stocks are down a further 42% to $0.64 so far, down 98% from their February 2021 high – yes that infamous February when it all started crashing.
But you can’t even see the 42% drop this morning in this dollar chart that shows how investors have been wiped out relentlessly since February 2021. Today’s drop was just the little lower ( data via Y-Charts):
Plummeting revenues, huge losses, financial reporting investigations.
Avaya revealed this morning in a Filing with the SEC that it posted a loss of $1.4 billion for the quarter to June 30, including an impairment charge of $1.27 billion, as revenue fell 19% from it a year ago to reach $577 million.
It disclosed an internal investigation into its financial results through June 2022.
He revealed that “separately, the audit committee has also opened an internal investigation to review matters related to a whistleblower letter which is still ongoing.”
He disclosed that he is also “reviewing matters relating to potential material weaknesses in the company’s internal control over financial reporting relating to the proper maintenance of its whistleblower log and the appropriate dissemination of documents and correspondence.” relating thereto to certain parties other than its board of directors”. directors.
He revealed that “with investigations not complete, the audit committee needs more time to complete its initial assessments.”
He disclosed that the 10-Q report for the quarter through June 30, due today, could not be filed with the SEC, due to these ongoing investigations.
New Avaya CEO Masarek said today that the results “reflect operational and execution shortcomings.” He announced “cost reduction initiatives”. He said, “We are taking aggressive steps to adjust Avaya’s cost structure to align with our contractual and recurring revenue business model.
“Besides…” this could be the end.
Back on June 27, the company announcement a $600 million private placement debt sale, which was “increased from the $500 million previously announced due to robust demand.” It consisted of $350 million in senior secured term loans and $250 million in exchangeable senior secured notes. The sale was organized by Goldman Sachs and JP Morgan Chase.
Proceeds from this debt offering were to be used to repay $350 million in convertible notes maturing in June 2023. But wait…
A month later, on July 28, Avaya hammered unhappy investors with an epic revenue and profit warning for the quarter ended June 30 and said he would release full results on August 9, which he did today, except they are still ” Preliminary” due to investigations into its financial reports.
Also on July 28, Avaya revealed that it had “removed” CEO Jim Chirico.
So let’s get back to that $600 million in new debt to pay off the $350 million in old debt next June…
The company today announced that it had $217 million remaining in cash and cash equivalents as of June 30, before proceeds from new debt issuance. This is down from $324 million in the prior quarter. He burns money by hand. There are four quarters to burn cash before June 2023, when it needs to have enough to pay off $350 million in debt and have enough cash by then to keep burning cash. So…
“Also,” the company said, “we may not be able to redeem those convertible notes after all. If not, this would trigger a default which would trigger a bankruptcy filing:
“The Company is currently engaging with its advisers to process the convertible notes, but there can be no assurance as to the certainty of the outcome of this assessment.”
The “advisers” she has hired are law firm Kirkland & Ellis, which has a large restructuring and bankruptcy group, and consultancy AlixPartners, best known for its turnaround and bankruptcy work. This was reported earlier by the WSJ.
“As a result” of this “plus” and “in addition to” the “decline in revenue” and “the negative impact of significant operating losses on the Company’s cash flow”, the Company may not succeed:
“The Company has determined that there is substantial doubt about the Company’s ability to continue as a going concern.”
Old bonds crumble, new debts plunge.
Those $350 million four-year unsecured notes, issued in June 2019 with a 2.25% coupon, took a dive. S&P rates them CCC, meaning substantial risk, but it’s still four notches above D for default (my cheat sheet for corporate bond credit ratings). Today they were trading at around 19.5 cents to the dollar (chart via Finra/Morningstar):
And the prices of the $600 million in loans and notes the company issued in June, which Goldman Sachs and JPMorgan Chase convinced investors to buy, including Brigade Capital Management and Symphony Asset Management, suffered losses. “exceeding $100 million,” according to the the wall street journalciting analyst commentary and data from MarketAxess and Advantage Data.
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