Wait a minute… Six weeks ago, Goldman Sachs and JP Morgan persuaded investors to buy $600 million in new debt.
By Wolf Richter for WOLF STREET.
This is not a recently collapsing IPO or SPAC merger creature, but a storied telecoms, software and services company that has been a vehicle of enrichment for Wall Street at the expense of investors on and off for the past 20+ years.
Avaya was spun off from telecommunications equipment maker Lucent Technologies at the end of the dot-com bubble. Lucent was spun off from AT&T in 1996, boomed during the dot-com bubble and collapsed during the dot-com bust. Avaya was bought out by PE firms TPG and Silver Lake in 2007 and was saddled with debt to pay back rich profits. In 2009, Avaya acquired collapsed telecommunications giant Nortel.
In January 2017, Avaya filed for bankruptcy under its debt. In December 2017, Avaya emerged from bankruptcy and its new shares were trading at that time.
“This is the beginning of an important new chapter for Avaya,” said CEO Jim Chirico at the time. More about him in a moment.
It’s these new stocks we’re talking about.
This morning, the company confirmed a previously-warned drop in sales and a whopping loss of 2.4 times its earnings. It also announced an investigation into its financial reporting. And it warned that it might not be able to repay its bonds maturing in June 2023, even though it had just raised $600 million by selling new debt to repay those bonds, and as a result of all of this: “There are considerable doubts about the company’s ability to continue as a going concern.”
So this is a candidate for bankruptcy. If it files for bankruptcy, it would be the second time.
Already imploded shares are now down another 42% to $0.64, down 98% from their peak in February 2021 – yes, that infamous February when everything started falling apart.
But you can’t even see the 42% plunge this morning on this dollar chart, which shows how investors have been relentlessly wiped out since February 2021. Today’s dip was just the little extra at the bottom (data via YCharts):
Plunging revenue, huge losses, financial reporting investigations.
Avaya said in an SEC filing this morning that it posted a loss of $1.4 billion, including an impairment charge of $1.27 billion, for the quarter ended June 30, as revenue in the Down 19% year over year to $577 million.
It has released an internal examination of its financial results through June 2022.
It announced that “the Audit Committee has also independently opened an internal investigation to review matters related to an ongoing whistleblower letter.”
It said it is “also reviewing matters related to potential material weaknesses in the company’s internal control over financial reporting, the appropriate maintenance of its whistleblower log and the proper dissemination of materials and related correspondence to certain parties other than its board of directors.” directors.”
It announced that “as the investigations are ongoing, the Audit Committee needs additional time to complete its initial assessments.”
It announced that its 10-Q report for the quarter ended June 30, due today, could not be filed with the SEC due to these ongoing investigations.
Avaya’s new CEO, Masarek, said today that the results “reflect operational and execution weaknesses.” He announced “cost-cutting initiatives.” He said, “We are taking aggressive steps to align Avaya’s cost structure with our contractual recurring revenue business model.”
“Besides…” this could be the end.
Back on June 27, the company announced a $600 million private placement debt sale, which “had been increased from the 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.
Proceeds from this debt offering were to be used to repay $350 million of convertible debentures maturing in June 2023. But wait…
A month later, on July 28, Avaya slammed unlucky investors with an epic warning about revenue and earnings for the quarter ended June 30, saying it would release full results on August 9, which it did today. except that they are still “provisional”. because of the investigations into its financial reporting.
Also on July 28, Avaya announced that it had “removed” CEO Jim Chirico.
So back to the $600 million in new debt to pay off the $350 million in old debt next June…
The company announced today that it had $217 million in cash and cash equivalents as of June 30, before proceeds from the new debt issuance. This was down from $324 million in the previous quarter. It burns cash hand-over-fist. There are four quarters to burn cash by June 2023, when it needs to have enough cash left to pay off $350 million in debt and by then have enough cash left to continue burning cash. So…
“Also,” the company said, we might not be able to redeem those convertible debentures after all. Failure to do so would trigger a default that would trigger a bankruptcy filing:
“The Company is currently working with its advisors to review the convertible bonds, but there can be no certainty as to the outcome of this review.”
The “advisers” hired are the law firm Kirkland & Ellis, which has a large restructuring and bankruptcy group, and the consulting firm AlixPartners, best known for its reorganization and bankruptcy work. This was just reported by the WSJ.
“As a result” of this “further” and “in addition to” the “decline in sales” and the “adverse impact of significant operating losses on the Company’s cash position” the Company may not:
“The Company has determined that there are significant doubts as to the Company’s ability to continue as a going concern.”
Old bonds crash, new debt crashes.
Issued in June 2019 with a coupon rate of 2.25%, these $350 million four-year unsecured notes have taken a cliff jump. S&P rates them CCC, implying significant risk, but that’s still four notches above D for default (my corporate bond credit rating cheat sheet). Today they traded at around 19.5 cents per dollar (chart via Finra/Morningstar):
And the prices of the $600 million in loans and debentures the company issued in June, which Goldman Sachs and JPMorgan Chase persuaded investors including Brigade Capital Management and Symphony Asset Management to buy, have losses of “over $100 million ‘ accepted to The Wall Street Journal, citing analyst commentary and data from MarketAxess and Advantage Data.
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