Avaya
This isn't how corporate finance is supposed to work
Something quite unusual is happening at Avaya Holdings Corp, formerly a unit of Lucent Technologies (the old AT&T Bell Labs), which I think might be interesting and instructive to those of you interested or already working in corporate finance related fields. I don’t know if the Avaya story qualifies as what my old law school professors used to call a “man bites dog” case, but it is certainly unusual and it raises a lot of questions about the behavior and judgement of corporate executives and directors, investment bankers, lenders and investors, and their lawyers.
So let’s explore what seems to be happening at Avaya, beginning with a recital of recent developments to set the stage.
On May 10th, Avaya released its second quarter financial results, which were not well received, and the stock fell from $10 a week prior to the release to $3 two weeks after. A month later, on June 8, Avaya announced that it was seeking to raise $500 million in new debt to prefund the refinancing of its $350 million of 2.25% convertible notes maturing in June 2023, with the balance of proceeds to be used for general corporate purposes. At this time Avaya’s stock price had traded back up to $5. On June 23, Avaya announced that it had successfully placed $150 million of new 8% exchangeable notes with an exchange price of $4.30 per common share, and the next day it announced that it had upsized the exchangeable offering to raise a total of $250 million in new money. By this point Avaya’s stock price was back under $3, presumably reflecting the dilution associated with the newly issued securities.
On July 28, just two weeks after closing its exchangeable offering, Avaya announced the firing of its CEO and the appointment of his successor. In response the stock price fell by over 50%, from $2 to less than $1.
And just today, Avaya released preliminary Q3 results in lieu of a timely filing of its final results. The Company downgraded some of its previously issued financial guidance (lowering profit and cash flow estimates), announced that it would take an impairment charge of between $1.3 and $1.8 billion, indicated that it had hired financial restructuring advisors, and issued a statement that “the Company has determined that there is substantial doubt about the Company's ability to continue as a going concern”. Avaya also indicated that the Audit Committee of its Board of Directors had launched an internal investigation into the Q3 results, which referenced receipt of a whistleblower letter. To say the least, this was not a typical public company results release.
As I write, on the afternoon of August 9th, Avaya’s share price is at $0.65, down 97% year to date, and the Company’s market cap is just $55 million. The Company has over $2.8bn of financial debt, including the $350mm convert maturing next year, plus $800mm or so of net retirement plan liabilities and negative $1bn of shareholders equity (reflecting accumulated losses of $2.5bn). The Company’s pro forma unrestricted cash position is about $400mm, including the $250mm of exchangeable proceeds, and operating cash flow was negative $85mm for the last quarter and negative $200mm for the last nine months.
Today’s WSJ ran an interesting article (read here) which provides a bit more color on the Avaya situation, but raises as many questions as it answers. Apparently, Avaya and its bankers at Goldman Sachs were unable to raise the $500mm in debt financing initially targeted back in early June, even at a yield of 12.6%, but subsequently raised a smaller amount of $350mm in the form of secured debt at a yield of 15.5%. The Company’s $250mm exchangeable offering was placed with investors by JP Morgan and carries an 8% annual coupon with an exchange (conversion) price of $4.30 per common share. During the marketing process for the two financing deals, Avaya executives allegedly told investors (as reported by the WSJ) that the Company was on track to hit its previously issued earnings guidance, calling for $145mm in adjusted EBITDA for the third quarter. That estimate was slashed just one month later, to $55 million. Investors who purchased the $600 million of loans and securities issued by Avaya are now sitting on paper losses estimated by the WSJ at $100 million.
One does not need to have worked in corporate finance for decades, as I did, to understand that this is not how things are supposed to work. And while I don’t know enough about Avaya’s business, let alone what was going on behind the scenes, to form reliable judgements, I think it is fair to say that something seems to be seriously amiss here.
As a former investment banker, stories like this always get my attention. And I usually have two immediate responses: "WTF were the bankers on this deal thinking?” And also “there but for the grace of God go I”. I worked on a few bad deals over the course of my career, but I was never part of a team that got sued for malfeasance or flawed due diligence. Perhaps I was just lucky, but one really has to ask: What the heck was going on at Goldman Sachs and JP Morgan and where was their legal counsel? But of course the really serious questions must be directed at Avaya, both in the C-suite (where the CFO seems still to be employed, today at least) and on the Board of Directors (especially the Audit Committee). I sure hope that Avaya has paid the premiums on its D&O insurance policies; it’s going to need them.
This is really such an odd story that I do not know what educational lessons we can learn from it, although I am sure there are some good ones. But I will be following this story closely in the coming weeks and months to see what more comes out of the woodwork. As I learned living in my first apartment, there is never just one cockroach.
Links:
Avaya’s Collapsing Debt Deal Hits Clients of Golman and JPM, WSJ, August 9, 2022
Avaya Reports Preliminary Q3 Results and Updated Guidance, Avaya Corp Press Release