Avaya's Cost of Debt

In 2007, Avaya was acquired by TPG Capital and Silver Lake Partners, and inherited borrowings of up to $5 billion. The company may now have to provide yields even higher than in 2007; this comes as a result of the company's migration to the junk-debt market to refinance unpayable loans. Lenders who hold nine percent of a $1.43 billion term loan due in 2014 have been encouraged by the firm to push back maturities, despite stating it would more than double the interest rate to 7.25 percent in October.

In June 2011, the company requested a $1 billion initial public stock offering; this has not yet started. The Treasurer at Avaya, Matthew Boocher, stated that the company is looking to tap capital markets in 2013 to extend $2.8 billion of debt. Ever since the buyout, the borrowing costs of the company have been increasing in spite of market interest rates being at record lows.

A credit analyst at Moody's Investor's Service, Matthew Jones, said: “Time is [Avaya's] enemy right now. We are looking at the debt maturity pretty seriously because that’s the next big hurdle for them.”

Avaya paid an initial rate of 7.7 percent on its $3.8 billion term loan which it raised during the time of the takeover; since then, the firm's notes have risen to 14.57 percent. The Bank of America Merrill Lynch U.S. High Yield Index denotes that a fall from 8.72 percent to 6.9 percent in junk yields has also occurred.

A money manager at RS Investments in New York, Marc Gross, said that it may be unlikely that lenders of Avaya will be willing to extend their debt past maturity of $1.5 billion of unsecured bonds in 2015.

Decreases in the bond price lead short-term buyers such as hedge funds to situate themselves in the debt and, according to Gross, “some of these investors can be a lot more greedy and a lot more demanding. They need to figure out a way to refinance, and the more time it takes, the more desperate it becomes.”

Avaya attempted to lengthen the maturity on its term loan for October 2014; this pays a 2.75 percentage point interest, exceeding that of the London interbank rate. It also runs into a new loan which is due in October of 2017, with added interest. The rate was increased to the higher 7.25 percent.

The company was not able to extend $135 million of that loan to 2017, and this may therefore be due in July 2015. However, if the company can meet one of three conditions, including going public, this may not be the case.

Third quarter findings reveal that Avaya saw a drop in product revenues by $95 million and services revenues fell by $25 million. Overall revenues therefore came to $1.25 billion (a decrease from $1.37 billion in the same quarter of 2011), despite the rise in operating profit to $23 million (compared to the $92 million loss last year). Fourth quarter results will be announced on December 11, but presently, Avaya's net loss stands at $166 million.

It is thus easy to see why Avaya had the worst performing bonds last month in the Bank of America Merrill Lynch U.S. High Yield Index. Some investors lost 10 percent as the price fell, according to the Index. Gross said: “The big reason for the recent tumble in the bonds is the botched term loan extension. They do have a reasonable business that is worth a lot of money and should be able to rebound at some point. The maturity profile and inability to extend the maturity wall is getting to investors.”

Software services such as messaging, telephony, voice, video and web conferencing on hardware-like desk phones and conference phones are provided by Avaya. The company began trading independently on the New York Stock Exchange in October 2000. Following Avaya's $5.3 billion in annual revenue in 2007, the company was taken private by TPG (formerly Texas Pacific Group) and Silver Lake.

The $1.3 billion remaining term loan due in 2014 and the 2015 bonds represent 46 percent of the company's $6.1 billion debt; this is not inclusive of the undrawn revolving credit facility. (CY) Link