Avaya bankers mobilize to market exit financing ahead of November confirmation hearing

17 October 2017

Avaya and its bankers have begun the process of premarketing a USD 3bn exit facility to a select group Avaya’s prepetition lenders and new investors, according to six sources familiar with the matter. Goldman Sachs leads the effort for a first lien portion of up to USD 2.5bn, but the tranche sizes and proposed pricing remain in flux as investors grapple with the degree of competition and potential earnings decline that the telecommunications hardware and services provider will face in the coming years, they said.

 

Some holders of Avaya’s prepetition first lien debt, who are in line to take control of the company, have signed non-disclosure agreements to get an early look at the proposed USD 500m-USD 550m second lien piece, according to two of the sources. Only existing first lien holders will be asked to participate in the junior tranche, sources added.

 

Meanwhile, Goldman is looking to widely syndicate a USD 2.45bn-USD 2.5bn first lien portion, and has premarketed the facility to gauge appetite before the official launch, added four additional sources. Some investors have heard unofficial price whispers in the Libor+ 475bps-500bps area, though it remains a moving target, sources added.

 

While the company is emerging around a leaner capital structure, its declining earnings trajectory remains a point of concern, sources added. As such, some investors may push for wider pricing, they added.

 

For FY17, Avaya projects USD 3.2bn of total revenue, compared to USD 3.7bn in FY16, according to its latest disclosure statement. It then targets USD 2.778bn in FY18, USD 2.691bn in FY19 and a rebound to USD 2.693bn in FY20 and USD 2.721bn in FY21.

 

Adjusted EBITDA is also expected to decline to USD 844m in FY17 from USD 940m in FY16. The company projects USD 708m in adjusted EBITDA in FY18, USD 731m in FY19 and then an improvement to USD 781m in FY20 and USD 839m in FY21.

 

Leverage is 4.1x based on the 2018 estimate of USD 708m in EBITDA and the USD 3bn exit facility, or 3.2x after netting out a USD 660m cash balance expected at the end of the year.

 

However, some investors have voiced skepticism that the company can rebound, given uncertainties over whether its cloud platform will take hold. Moreover, some questioned whether Avaya’s products can compete with other vendors including RingCentral, Five9, and 8x8, said one of the sources. And Avaya rival Genesys recently acquired the pure cloud platform Interactive Intelligence, stepping up competition in the cloud.

 

For its part, Genesys has tried actively to lure Avaya customers, posting on its blog commentary by an independent consulting firm opining on Avaya’s Chapter 11 filing. Genesys also made a failed bid to acquire Avaya’s call center business last year.

 

As comps for Avaya’s exit facility pricing, some investors point to Eastman Kodak, since the technology company also exited Chapter 11 with a first and second lien exit loan back in 2013 and encountered a degree of secular decline. At the time, Kodak’s USD 420m six-year first lien cleared at L+ 625bps with a 1% floor and 98 OID, while the USD 275m seven-year second lien TL allocated at L+ 950bps with a 1.25% floor and 97.5 OID.

 

Kodak’s first lien TL is now quoted at 97.375/98.625, according to Markit.

 

Investors also point to Sungard Availability Services, another tech company facing headwinds and secular decline, that earlier this year extended a portion of its term loan to 2021. The extended USD 471m L+ 700bps (1% floor) tranche is quoted in the 92.875/95.375 context, according to Markit. Sungard AS is now working with KKR Capital Markets for assistance in addressing a 2019 stub that remains after the amend-and-extend.

 

Avaya has toiled in a Chapter 11 process since the start of the year, as negotiations between various creditor groups stretched across several months. The debtor’s current plan would hand first liens 91.5% of the reorganized equity and cash proceeds from the syndication of the new first lien debt after payment of the USD 727m in DIP financing claims. Second lien noteholders would take home 1% of the reorganized equity.

 

The company has scheduled a confirmation hearing for 15 November, and the deadline to vote on the plan is 27 October, according to the disclosure statement.

 

Meanwhile, a rift between an ad hoc group of first lien lenders and a cross holder group has emerged over professional fees. The parties recently entered into mediation as first lien lenders argue that adequate protection under the DIP facility prevents the fees from the cross holder group to be paid for services related to second lien holders.

 

Representatives for Goldman and Avaya, respectively, declined comment.