Wait a minute… Six weeks ago, Goldman Sachs & JP Morgan talked investors into buying $600 million of new debt.
By Wolf Richter for WOLF STREET.
This isn’t a recent IPO or SPAC-merger creature that is now collapsing, but a storied telecom, software, and services company that has become a Wall Street enrichment device at investor expense time after time over the past 20-plus years.
Avaya was spun off by telecom equipment giant Lucent Technologies at the end of the dotcom bubble. Lucent was spun off by AT&T in 1996, boomed during the dotcom bubble, and collapsed during the dotcom bust. Avaya was acquired in 2007 by PE firms TPG and Silver Lake and loaded up with debt to pay rich gains back to them. In 2009, Avaya acquired the collapsed telecom giant Nortel.
In January 2017, buckling under its debts, Avaya filed for Chapter 11 bankruptcy. In December 2017, Avaya emerged from bankruptcy, and its new shares started trading at the time.
“This is the beginning of an important new chapter for Avaya,” said CEO Jim Chirico at the time. More on him in a moment.
It’s these new shares we’re talking about.
This morning, the company confirmed the previously warned-about plunging revenues and a gigantic loss 2.4 times the size of its revenues. In addition, it disclosed an investigation into its financial reporting. And it warned, that it might not be able to pay off its bonds due in June 2023, though it had just raised $600 million by selling new debt in order to pay off these bonds, and that as a consequence of all of this, “there is substantial doubt about the Company’s ability to continue as a going concern.”
So, this is a bankruptcy candidate. If it files for bankruptcy, it would be the second time.
The already imploded shares collapsed another 42% to $0.64 at the moment, down by 98% from their high in February 2021 – yes that infamous February when it all started coming apart.
But you can’t even see the 42% plunge this morning in this dollar-chart that shows how investors have gotten relentlessly wiped out since February 2021. Today’s plunge was just the little extra at the bottom (data via YCharts):
Plunging revenues, huge losses, investigations into financial reporting.
Avaya disclosed this morning in an SEC filing that it booked a $1.4 billion loss for the quarter through June 30, including an impairment charge of $1.27 billion, as revenues plunged 19% from a year ago to $577 million.
It disclosed an internal investigation into its financial results through June 2022.
It disclosed that “separately, the Audit Committee has also commenced an internal investigation to review matters related to a whistleblower letter that remains ongoing.”
It disclosed that it is “also reviewing matters related to potential material weaknesses in the Company’s internal control over financial reporting with respect to the appropriate maintenance of its whistleblower log and the proper dissemination of materials and correspondences related thereto to certain parties other than its Board of Directors.”
It disclosed that, “As the investigations are not complete, the Audit Committee requires additional time to complete its initial assessments.”
It disclosed that the 10-Q report for the quarter through June 30, due today, could not be filed with the SEC, because of these ongoing investigations.
Avaya’s new CEO Masarek said today that the results “reflect operational and executional shortcomings.” He announced “cost-cutting initiatives.” He said, “We are taking aggressive actions to right-size Avaya’s cost structure to align with our contractual, recurring revenue business model.”
“Furthermore…” this could be the end.
Back on June 27, the company announced a $600-million private-placement debt sale, that had been “upsized from previously announced $500 million 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 arranged by Goldman Sachs and JP Morgan Chase.
The proceeds of this debt offering were supposed to be used to pay off $350 million in convertible notes due in June 2023. But wait…
A month later, on July 28, Avaya hammered hapless investors with an epic warning about revenues and earnings for the quarter ended June 30 and said it would release full results on August 9, which it did today, except they’re still “preliminary” because of the investigations into its financial reporting.
Also on July 28, Avaya disclosed that it had “removed” CEO Jim Chirico.
So back to that $600 million in new debt to pay off the $350 million in old debt next June…
The company reported today that it had $217 million in cash and cash equivalent left as of June 30, predating the proceeds from the new debt issuance. This was down from $324 million in the prior quarter. It’s burning cash hand-over-fist. There are four quarters to burn cash before June 2023, when it has to have enough left over to pay off $350 million in debt plus have enough cash left over by then to keep burning cash. So…
“Furthermore” the company said, we may not be able to pay off those convertible notes after all. If it cannot, it would trigger a default which would trigger a bankruptcy filing:
“The Company is currently engaging with its advisors to address the Convertible Notes, but there can be no assurance as to the certainty of the outcome of that assessment.”
The “advisors” it has engaged are law firm Kirkland & Ellis, which has a large restructuring and bankruptcy group, and consulting firm AlixPartners, best-known for its turnaround and bankruptcy work. This was reported just now by the WSJ.
“As a result” of this “furthermore” and “in addition to” the “decline in revenues” and the “negative impact of significant operating losses on the Company’s cash balance,” the company might not make it:
“The Company has determined that there is substantial doubt about the Company’s ability to continue as a going concern.”
Old bonds cliff-dive, new debt plunges.
These $350 million in unsecured four-year notes, issued in June 2019 with a coupon interest of 2.25%, have performed a cliff-dive. S&P rates them CCC, meaning substantial risk, but that’s still four notches above D for default (my cheat sheet for corporate bond credit ratings). Today, they traded at around 19.5 cents on the dollar (chart via Finra/Morningstar):
And prices of the $600 million in loans and notes that the company issued in June, and which Goldman Sachs and JPMorgan Chase talked investors into buying, including Brigade Capital Management and Symphony Asset Management, have plunged, and investors have taken losses “exceeding $100 million” on it, according to the Wall Street Journal, citing analyst commentary and data from MarketAxess and Advantage Data.
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