Avaya looks to reduce debt burden and re-emerge stronger with Chapter 11 filing

Avaya says that the sale of its Contact Center business is not being considered as a way to restructure its balance sheet, but that it is in discussions to possibly sell off other assets.

Kevin Kennedy, Avaya’s CEO

Avaya has filed for bankruptcy under chapter 11 of the U.S. Bankruptcy Code. Avaya customers and partners should not anticipate that the company will wind up like Nortel, whose enterprise assets Avaya acquired after Nortel went bankrupt. The company announced in its statement that the Chapter 11 filing has been done to restructure its balance sheet, so that it can emerge with a much-reduced debt load.

Avaya, like some of its own competitors in the unified communications space, has been hurt badly by the changes to the market that Web 2.0 created. Hardware infrastructure and the maintenance revenues tied to it both dropped off significantly. While Avaya moved into the new software and SaaS spaces, the revenue gap between what the new age offerings produced was significant. Sales executives turned over repeatedly, caught in the trap of being unable to meet the margins of the past with the offerings of the present.

Last year the company believed that it had turned the corner, that it had completed the needed restructuring, and that it was in a position to drive forward successfully, doubling down on contact centre, workflow automation and networking. Today’s news indicates that optimism was misplaced. It now says the company’s existing debt load was too much to overcome.

“We have conducted an extensive review of alternatives to address Avaya’s capital structure, and we believe pursuing a restructuring through chapter 11 is the best path forward at this time,” said Kevin Kennedy, Chief Executive Officer of Avaya, in a statement. “Reducing the Company’s current debt through the chapter 11 process will best position all of Avaya’s businesses for future success.”

The Avaya statement gave a brief summary of the company’s assessment of its priorities in handling assets as part of the restructuring. As part of Avaya’s comprehensive assessment of options to address its capital structure, expressions of interest in various Avaya assets, including its Contact Centre business, were evaluated. After extensive evaluation in consultation with its financial and legal advisors, the Avaya Board of Directors determined that focusing on the Company’s debt structure is paramount and a sale of the Contact Center business at this time would not maximize value for Avaya’s customers and all of its stakeholders. At the same time, they acknowledged that Avaya remains in ongoing negotiations to monetize certain other assets within their business, as appropriate.

“This is a critical step in our ongoing transformation to a successful software and services business,” Kennedy said. “Avaya’s current capital structure is over 10 years old and was put in place to support our business model as a hardware-focused company, which has evolved significantly since that time. Now, as a result of the terms of Avaya’s debt obligations and the upcoming debt maturities, we need to recapitalize the Company.”

Kennedy emphasized that the problem was the debt load, not the basic profitability of their restructured business.

“Our business is performing well, and we are confident that we can emerge from this process stronger than ever, as this path is a reflection of our debt structure, not the strength of our operations or business model,” he said. “Pursuing restructuring through chapter 11 will enable us to reduce Avaya’s debt and interest expense, while providing increased financial flexibility to further invest in innovation and growth to enhance our market-leading competitive position. Most importantly, we are keenly focused on minimizing disruption to our customers, partners, and employees and do not expect to experience any material disruptions during the chapter 11 cases.”

Avaya has obtained a committed $725 million debtor-in-possession financing facility underwritten by Citibank. They say that in combination with cash from operations, this is expected to provide sufficient liquidity during the chapter 11 cases to support the company’s continuing business operations and minimize disruption. They also filed a number of “first-day” motions with the Court to facilitate a smooth transition into chapter 11 and minimize business disruption. These included a request authorization to continue certain customer and partner programs, and to honor certain employee compensation and benefit obligations.