Avaya Bankruptcy and its impact on customers

Avaya Bankruptcy: Good or Bad for Customers?

Avaya should be better positioned to minimise impact to its existing base than Nortel had been years ago, but quick agreement with creditors is crucial. As regular No Jitter readers are no doubt well aware, and as many had been anticipating, last week Avaya filed for Chapter 11 bankruptcy protection. How the bankruptcy proceeds and how the company moves forward are key concerns for Avaya customers, employees, and the market in general. Having been through a somewhat similar event with Nortel in 2009, we can make some predictions as well as forge some key questions. Nuts & Bolts Avaya’s goal is to free itself from the shackles of the huge debt load left by the combination of the original private equity buyout and the Nortel acquisition. “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. Reducing the company’s current debt through the Chapter 11 process will best position all of Avaya’s businesses for future success,” said Kevin Kennedy, Avaya CEO, in a prepared statement.


Avaya – what now for customers?
Avaya has had to generate about $900 million of earnings before interest, tax, depreciation and amortisation (EBITDA) to cover debt and pension payments, as well as other costs, just to be cash neutral. With revenue decreasing at about 8% per year for the last four years, the strategy of increasing EBITDA percentage of the decreasing revenue to cover the debt and pension load would most assuredly have to fail at some point. Before the bankruptcy, Avaya had investigated selling a business unit like contact centre to raise cash, but due to a combination of business and technology integration with UC and other factors, the company has decided that was not practicable (see related post, “Avaya Keeps Crown Jewel, Contact Centre”). Once Avaya realised selling off the contact centre or other business was not a viable path, filing for bankruptcy sooner rather than later made sense since bankruptcy eliminates any further cash out for debt payments. That, combined with the $600 million in loans due in October, seems to have driven the decision.

Fast or Slow?
The primary question is how the Avaya bankruptcy will proceed. Will it be like the recent Aspect reorganisation that took a little over two months, or will it shape up like Nortel’s process, which took seven-plus years and resulted in the company’s break-up? (See related post, “Why Aspect Isn’t Another Nortel.) Even though the Nortel bankruptcy took more than seven years to settle, within less than two months it had gone from a “quick debt elimination” to a fire sale. The key question is whether a company and all creditors have agreed or are near to agreeing on plans for how they will be treated in the process. A free-for-all can ensue, if not.
The difference between how the Aspect and Nortel bankruptcies played out serves as a good example. Note this line from a CFO.com article on Aspect’s March 2016 filing (emphasis is mine): “In a Chapter 11 petition filed Wednesday, Aspect said a capital restructuring plan backed by its creditors would eliminate $320 million of second-lien debt and convert $60 million of first-lien debt into 100% of the reorganised company’s equity.” In other words, all creditors agreed what was going to happen prior to the bankruptcy filing. Whether Avaya can come to a quick agreement with creditors and move forward in the near term is a key question. As it said in an FAQ for analysts and consultants: “The timing of the outcome is dependent on negotiations with key stakeholders and the subsequent approval of the Court, among a host of other considerations, making it difficult at this point to project a timeframe for emerging from Chapter 11, but the Company’s advisors are committed to completing this process so the Company may emerge from chapter 11 as quickly as possible.”

This makes it clear that Avaya has no plan in place and will depend on the court to define its path forward. However, Avaya and the court have already agreed to let Avaya have access to $425 million of the $725 million new loans arranged with Citigroup to assure the company has enough cash to move through the bankruptcy process. Hopefully, all the bondholders will realise that the best way to maximise their value as the new “owners” of Avaya is to expedite this process with quick agreement on a resolution. The challenge is getting the senior/first position bondholders to agree on the asset distribution ratios with the junior/second position creditors. The reality is that creditors see all corporate money and assets as belonging to them, and they object if the “value” decreases. In the Nortel bankruptcy, major plans and incentives were put in place not to burn any cash. I assume it will be similar for Avaya (the management team will have to present an operating plan to the creditors and the court in the next weeks). Unfortunately, I suspect that the Avaya customers will be even more conservative in approving Avaya purchases than the Nortel base had been — they’ve seen this movie before. I recently talked to an Avaya customer that had just done an RFP and had decided on an Avaya upgrade over a Cisco rip and replace; I am very sure the company will put that decision on hold and revisit the entire process, starting today. In fact, in a recent public financial review, Avaya indicated that 13% of revenue came from new customers; that revenue is clearly at immediate risk. Mitel is the natural Avaya alternative.

Feel free to share…

Share on facebook
Share on google
Share on twitter
Share on linkedin

Pizza Friday in support of the Medical Sector

Raise money for Alder Hey, get useful info and enter our free prize draw! Sign up to our newsletter and we’ll donate £1 on your behalf to Alder Hey! We love any excuse to raise money for Alder Hey, our nominated charity, so we’re giving a £1 donation for every Practice Manager that signs up to our monthly newsletter!  Sign up now and raise some money, plus you could always win our…

5 Essential Business Phone Headset Etiquette Rules for Work

Once upon a time, office workers walked around with cricks in their necks from cradling phone handsets between their heads and shoulders. Fortunately, phone technology has advanced since then. If you have a business phone like the MiVoice 5360 IP Phone, you can use a headset to both save your neck and free your hands for other tasks, like note taking. But with great power, comes great responsibility…

How a Phone System can help you on holiday

It’s that time of year again when we all start thinking about our Summer holidays. However, it can be difficult to get some much-needed time out of the office if you’re running a business. We recently read an article from Frontier Business Edge which could be useful so we wanted to share. Your Phone System can be a great asset when you’re away from the office…

Avaya Bankruptcy and its impact on customers

With the recent financial crisis at Avaya, customers need to consider how to best protect their current assets and also plan for the future of their business Comms. We read a great article by Phil Edholm for nojitter.com that explains how Avaya customers may be impacted. It’s in the second tab down and worth a read…

Call us: 03330 047 047
Email us: info@checkcomm.com

Copyright © 2018 Award Winning Provider of Telephone Systems, Maintenance & Support, CCTV & Security | North West | North Wales | UK | All rights reserved.