Avaya Inc. – Down to “Gravely Insufficient” Last $45mn in Cash, Debtors Get Interim Access to $400mn of New Money (Sort of) Term Loans; Will Return to Court Shortly Seeking Approval of $128mn DIP ABL Facility

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February 15, 2023 – The Court hearing the Avaya cases issued an order authorizing the Debtors to: (i) access $400.0mn in new money (albeit with almost $100.0mn earmarked to settle prepetition borrowings), debtor-in-possession (“DIP”) financing, on an interim basis under a Term Loan DIP facility (the “DIP Term Loan Facility”) and (ii) use cash collateral [Docket No. 77, which attaches the DIP Term Loan Credit Agreement and various fee letters]. 

The Debtors, who entered bankruptcy with a "gravely insufficient" $45.0mn of cash, anticipate that proceeds of the DIP Term Loan Facility will be used, inter alia, to provide $50.0mn of liquidity for the Debtors’ non-Debtor foreign affiliates (the “NFAs”); to fund a Foreign Reserve Account with $40.0mn; cash collateralize approximately $40.0mn of letters of credit (issued by Goldman Sachs and Citibank); repay the obligations ($56.0mn) under the Prepetition ABL Facility; and for general corporate needs.

The $100.0mn balance, of what is in total $500.0mn of DIP Financing is to be made available upon issuance of a final DIP order, with consideration of that order now scheduled for March 7, 2023.

The DIP Term Loan Facility converts into a exit term loan facility at emergence.

In their filing date press release, the Debtors noted: "The Company has received commitments for $628 million in debtor-in-possession ('DIP') financing, including a $500 million new-money term loan from the Investor Group led by Apollo Global Management, Inc. and Brigade Capital Management, LP, among others, and a $128 million ABL facility from a bank syndicate led by Citi. Upon Avaya’s emergence from the court-supervised process, the $500 million new-money term loan and $128 million ABL facility will roll into exit facilities….Additionally, as part of the Financial Restructuring, certain members of the Investor Group have committed to provide $150 million of additional new-money financing through a fully backstopped debt rights offering at exit. This new committed financing of approximately $780 million, together with cash on hand and cash generated from ongoing operations, is expected to provide substantial liquidity to support Avaya during the restructuring process and beyond…."

As to the promised $128.0mn DIP ABL Facility, the Debtors note: "The Debtors intend to return to the Bankruptcy Court in the very near term to seek approval of the DIP ABL Facility…"

Case Status

On February 14, 2023, Avaya Inc. and 20 affiliated Debtors (“Avaya” or the “Debtors”) filed for Chapter 11 protection on a "prepackaged" basis noting estimated assets between $1.0bn and $10.0bn; and estimated liabilities between $1.0bn and $10.0bn.

On February 15th, the Court hearing the Avaya cases issued an order approving: (i) the Debtors’ Disclosure Statement (on an interim basis), (ii) proposed Plan solicitation and voting procedures and (iii) a timetable culminating in a March 22nd confirmation hearing [Docket No. 79].

The DIP Motion

The motion [Docket No. 47] states, “Through their proposed investment banker, Evercore Group L.L.C. ('Evercore'), the Debtors reached out to various stakeholders across the Debtors’ capital structure and third-parties, including Holders of Prepetition ABL Claims, the PW Ad Hoc Group, and the Akin Ad Hoc Group (together with the PW Ad Hoc Group, the 'Ad Hoc Groups')….This initial outreach [see more on DIP marketing below] revealed that members of the Ad Hoc Groups and Citibank, as the Prepetition ABL Agent, would be willing to provide postpetition financing to fund a comprehensive restructuring.

In connection with the filing of these Chapter 11 Cases, the Debtors have achieved extraordinary certainty regarding their exit from chapter 11, by obtaining (a) a $500 million priming super priority senior secured debtor in possession facility (the 'DIP Term Loan Facility') that converts into a exit term loan facility (the 'Exit Facility') upon emergence, and (b) commitments for a debtor in possession asset-based revolving credit facility (the 'DIP ABL Facility'), a U.S. only, new money, approximately $128 million facility that will convert into a senior secured asset-based revolving credit (the 'Exit ABL Facility'), upon emergence. The Debtors intend to return to the Bankruptcy Court in the very near term to seek approval of the DIP ABL Facility….

The Debtors, with the assistance of their advisors, analyzed the quantum of capital needed and the potential forms that a financing and/or restructuring could take and determined that it would not be possible to administer these Chapter 11 Cases, pursue the transaction pursuant to the RSA and the Plan, operate the Debtors’ business in the ordinary course, and pay administrative costs during these cases solely through the use of Cash Collateral. Without immediate access to the DIP Term Loan Facility, the Debtors will be unable to meet their near-term working capital needs, stabilize their operations, fund the costs of administering these cases, and to continue to effectuate a value-maximizing operational restructuring commenced prepetition.

The Debtors have an urgent need for significant and immediate liquidity. The Debtors enter these Chapter 11 Cases with approximately $45 million in cash on hand, which is gravely insufficient to meet the Debtors’ liquidity needs both in the near-term and throughout these Chapter 11 Cases. Without immediate financing, the Debtors project that they will be unable to pay essential costs required to continue operating as a going concern, resulting in immediate and irreparable harm to the Debtors’ business on a global scale. The Debtors require cash to, among other things, satisfy payroll obligations, honor obligations under their customer contracts, maintain insurance coverage, pay taxes, bolster the liquidity position of the NFAs, make other payments integral to the continued management, operation, and preservation of the Debtors’ business, and provide an avenue to exit these Chapter 11 Cases expeditiously.

The Debtors’ liquidity needs are particularly pressing in relation to ensuring the NFAs maintain sufficient and necessary liquidity to avoid value-destructive business interruptions. The NFAs [ie non-Debtor foreign affiliates] operate more than 150 bank accounts and must maintain a certain level of global liquidity to sustain their international operations.

The NFAs also have immediate liquidity needs which need to be addressed. Prior to February 28, more than $15 million in payroll obligations and $7 million in pension obligations will need to be paid out of the Notional Cash Pool for the European entities. This would leave the cash pool with insufficient cash to support ongoing operational needs, outside of funding coming from the Debtors to supplement their liquidity. The Initial Intercompany Transaction will provide additional liquidity for the NFAs to fund their operations.

The Debtors intend to use $50 million of the DIP Term Loan Facility proceeds to fund the Initial Intercompany Transaction. These funds will be used to convert the existing international cash pooling system from a notional to a physical pool by eliminating certain negative balances; to satisfy certain payroll obligations; to fund certain pension and retirement obligations; and to otherwise fund the working capital needs of the NFAs.”

Key terms of the DIP Term Loan Facility:

  • Borrowers: Avaya Inc. a Delaware corporation
  • Guarantors: (a) Holdings, (b) each Domestic Subsidiary (other than an Excluded Subsidiary) that provides the Guarantee on the Closing Date, which in any event will include all Subsidiaries that are Debtors on the Closing Date, or becomes a party to the Guarantee after the Closing Date pursuant to the DIP Term Loan Credit Agreement or otherwise (including becoming a Debtor in the Chapter 11 Cases unless waived), and (c) the Borrower (other than with respect to its own Obligations). 
  • DIP Lenders: The lending institutions from time to time party to the DIP Term Loan Credit Agreement.
  • Administrative Agent and Collateral Agent: Wilmington Savings Fund Society, FSB.
  • Term: The maturity date with respect to the DIP Facility (the “Maturity Date”) shall be the earliest of: 
    • six (6) months after the Closing Date (or if such day shall not be a Business Day, the next succeeding Business Day) (the “Scheduled Maturity Date”); 
    • 45 days after the Petition Date if the Final Order has not been entered prior to the expiration of such 45-day period, unless otherwise extended by the Required Lenders;
    • the Consummation Date; 
    • the acceleration of the Loans and the termination of the Commitments with respect to the Term Facility; 
    • the consummation of a sale of all or substantially all of the assets of the Borrower (or the Borrower and the Guarantors) pursuant to section 363 of the Bankruptcy Code; and 
    • the termination of the Restructuring Support Agreement.
  • Commitments: The DIP Facility commitments total $500.0mn, with $400.0mn available with the interim DIP order
  • Interest Rates: The DIP Term Loans will bear interest at a rate equal to SOFR plus 8.00%.
  • Use of Proceeds: The Borrower will use the proceeds from the Loans (i) to consummate the Prepetition ABL Repayment, (ii) for working capital and general corporate purposes of the Debtors; (iii) to pay obligations arising from or related to the Carve Out; (iv) to pay professional fees in connection with the Chapter 11 Cases; (v) to make adequate protection payments; (vi) to pay fees and expenses incurred in connection with the transactions contemplated hereby and in the Restructuring Support Agreement; (vii) to fund an intercompany loan in an amount not to exceed $50,000,000 (the “Initial Intercompany Transaction”) by Sierra to Avaya International Sales Ltd (the “Initial Intercompany Borrower”) to be used for working capital and general corporate purposes of foreign Subsidiaries of the Borrower, including, but not limited to, to fund certain cash pooling accounts of certain foreign Subsidiaries of the Borrower and opened at Citibank, N.A. and its affiliates; and (viii) to fund a deposit of up to $40,000,000 to a segregated account held by the Borrower (the “Foreign Reserve Account”) for purposes of backstopping the liquidity of certain foreign non-Debtor affiliates to the extent necessary to preserve the value of the Debtors’ international. business; provided that the use of funds in the Foreign Reserve Account during the Chapter 11 Cases shall be subject to the Foreign Reserve Protocol.
  • New Money: $500.0mn ($400.0mn Interim)
  • Roll-Up: N/A
  • Fees: 
    • Term Upfront Fee of 4.00% 
    • Put Option Premium of  6.0% of the aggregate principal amount of the Commitments as of the date of the Commitment Letter without giving effect to any termination or reduction, (x) to the extent the Plan shall have been consummated on or prior to the Maturity Date, to any Lender thereof or any Person designated by such Lender (pro rata in accordance with the outstanding principal amount of the Commitments and Loans held by such Lender on the date that the Put Option Premium is payable), in shares of New Equity Interests at a 37.5% discount to an implied equity value of $538,812,500, or (y) otherwise, to the Administrative Agent, for the ratable account of each Lender thereof (pro rata in accordance with the outstanding principal amount of the Commitments and Loans held by such Lender on the date that the Put Option Premium is payable), in cash; 
    • Exit Fee in cash in an amount equal to 1.0% earned on the Closing Date; 
    • Fronting fee of 0.375% of the aggregate Commitments as of the Closing Date
    • Reasonable and documented out-of-pocket expenses
  • Milestones: The Borrower shall comply with the following Milestones (collectively, the “Milestones”):
    • Deadline to enter interim order; within three (3) days following the Petition Date;
    • Deadline for Escrow Payment shall occur; no later than the date when the Interim DIP Order is entered by the Bankruptcy Court;
    • Deadline to enter final order; within forty five (45) days following the Petition Date;
    • Deadline for Rights Offering (as defined in the Restructuring Support Agreement) shall have been commenced; no later than ten (10) days after the Petition Date;
    • Deadline for 2023 PBGC Settlement shall have been approved by the Court; no later than confirmation of the Plan;
    • Deadline to enter order provisionally approving the adequacy of the Disclosure Statement, in form and substance acceptable to the Debtors and the Required Lenders; no later than three (3) days after the Petition Date;
    • Deadline to file The Plan and Disclosure Statement; no later than one (1) day after the Petition Date;
    • Deadline to enter order approving the adequacy of the Disclosure Statement; no later than sixty (60) days after the Petition Date;
    • Deadline to enter order confirming the Plan; no later than sixty (60) days after the Petition Date;
    • Deadline for substantial consummation of the Plan shall occur; no later than ninety (90) days after the Petition Date.

Marketing Efforts

The Debtors' investmant banker Evercore provides: "In August 2022, the Debtors, with the assistance of Evercore and their other advisors, began discussing potential comprehensive restructuring proposals with various stakeholders across the Debtors’ capital structure. These efforts included engaging with the Debtors’ existing lenders about the broader restructuring, including with Holders of Prepetition ABL Claims, the PW Ad Hoc Group, and the Akin Ad Hoc Group (together with the PW Ad Hoc Group, the 'Ad Hoc Groups'). Following months of extensive discussions with these stakeholders, in mid-December, the Company and its advisors shifted their focus to an in-court restructuring when it became clear an out-of-court solution no longer had requisite lender support and could not achieve the holistic deleveraging necessary to best effectuate the Debtors’ long-term business plan. To that end, an overwhelming majority of the Debtors’ capital structure is supportive of the value-maximizing deleveraging transaction contemplated by the negotiated RSA and Plan.

Having shifted the focus to an in-court, holistic restructuring process, Evercore began the process of soliciting debtor-in-possession financing proposals. In addition to engaging with the Debtors’ existing lenders, Evercore explored financing from potential third parties. Starting in December 2022, Evercore solicited interest from twenty-one third-party sources of financing outside of the Debtors’ capital structure…Of these potential third-party lenders, nine executed confidentiality agreements with the Company and received access to non-public information. The Company consequently received three asset-based revolving loan proposals from potential third-party lenders and no term loan financing proposals, other than the DIP Term Loan Facility (and commitments for the DIP ABL Facility) that the Debtors have secured from existing lenders. 

The feedback from third parties that Evercore contacted with respect to the DIP term loan marketing process was conclusive: no third party provided a term sheet or any indication of interest, whether on a priming or non-priming basis. Nor did any party within the Debtors’ capital structure, aside from the DIP Term Loan Lenders, make a DIP term loan proposal.

Evercore solicited an asset-based revolving loan proposal via Citibank N.A. (“Citibank”), the administrative and collateral agent under the Prepetition ABL Facility, from all current ABL syndicate banks, and three additional banks outside of the bank syndicate. In addition, Evercore solicited a new money term loan proposal from members of the Ad Hoc Groups. Over the course of multiple weeks, the Debtors, with the assistance of Evercore and their other advisors, engaged in various conversations and extensive negotiations to achieve the best possible terms for the DIP Financing. Over the course of these negotiations, it became clear that the DIP Term Loan Facility, together with commitments for the DIP ABL Facility, would best serve the liquidity needs of the Debtors."

Prepetition Indebtedness

Avaya’s prepetition capital structure includes approximately $3.4 billion in funded debt as of the Petition Date, consisting of: (a) the Prepetition ABL Facility; (b) three tranches of Prepetition Term Loans; (c) one series of Legacy Notes; (d) one series of Secured Exchangeable Notes; and (e) one series of HoldCo Convertible Notes.

As of the Petition Date, Avaya’s prepetition funded indebtedness can be summarized as follows: 

 Budget (see Docket No. 77)

About the Debtors

According to the Debtors: “Avaya Businesses are built by the experiences they provide, and every day millions of those experiences are delivered by Avaya Holdings Corp. (NYSE: AVYA). Avaya is shaping the future of customer experiences, with innovation and partnerships that deliver game-changing business benefits. Our communications solutions power immersive, personalized, and memorable customer experiences to help organizations achieve their strategic ambitions and desired outcomes. Together, we are committed to helping grow your business by delivering Experiences That Matter."

Corporate Structure Chart

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