In times of uncertainty, it is best to trust our systems. There are systems that keep us safe such as air traffic control, providing that we arrive at safely distant destinations. There are street light systems that help us cross at busy intersections. In our government, we must have faith in systems, including our separation of powers and a free press.
For the business world, other systems such as the Chapter 11 processes, may not be well understood, but many experts argue are critical.
The Chapter 11 set of processes are especially important at this period of time for the universe of stakeholders that I wrote about recently in "Avaya’s Chapter 11 filing sends waves of disruption." In this follow-up post, I’ll talk a bit about the Chapter 11 processes and provide some information I gained recently that makes me feel just a bit more comfortable about the future for that universe that surrounds Avaya. Part of this is some recent research and part is due to a briefing that I participated in with Avaya corporate treasurer John Sullivan.
Expert opinion on Chapter 11
In 2009, Sen. Elizabeth Warren (at the time professor at Harvard Law School) and Jay Lawrence Westbook, professor at University of Texas Law School, wrote that among “the pantheon of extraordinary laws that have shaped the American economy and society and then echoed throughout the world, Chapter 11 of the U.S. Bankruptcy Code deserves a prominent place.”
The two co-authored the scholarly paper analyzing Chapter 11 cases. Their writing came shortly after a revamp of the U.S. bankruptcy laws in 2005 and is a defense of system in the face of “critics,” who they say “often insist that economic efficiency requires the near abandonment of Chapter 11.”
Warren and Westbrook further said, “Because the Chapter 11 hospital is explicitly designed to deal with both ailing patients and corpses, the business failure rate can be understood better if the two kinds of cases are separated.”
A further distinction they make, that is important to our discussion, is between “the debtor's ability to advance a plan—any plan—of reorganization” and those who don’t. Their research showed that “the success rate soars to more than 70 percent” when a plan is offered.
Avaya's Chapter 11 filing
This brings me to some of what I learned in the briefing with Mr. Sullivan. In a recent meeting with a group of analysts, consultants and media, Sullivan expanded, saying that at Avaya, “we’re still operating, we’re still moving forward, and it is really more like the American Airlines or the Pacific Gas and Electric [cases] where those companies used Chapter 11 for a certain purpose and they emerged stronger and healthier.” Sullivan emphasized, “Clearly there is no threat to our continued operation.”
Juan Gonzalez, research director at Frost & Sullivan, asked Sullivan, “Why did Avaya not announce a plan for reorganization prior to filing for Chapter 11?” Gonzalez explained that in many markets, especially in the region subject of his expertise Latin America, processes like Chapter 11 for business reorganizations don’t exist. Gonzalez explained that in those markets, Avaya’s lack of a plan contributed to “uncertainty” about the company’s future.
Sullivan said, “First of all, Chapter 11 is not something that you want to go into unless you are really out of other options.” In 2015, Avaya refinanced about $2.6 billion of debt through an “amend and extend” process at “very favorable rates,” he said. “That was very successful.”
Today, however, “the markets are more expensive, interest rates are starting to rise,” Sullivan said. He explained that Avaya has currently maturing debt and using the markets to refinance would increase Avaya’s interest expense significantly. Sullivan described this as a “snowball effect,” where the debt would become untenable.
In response to Gonzalez’s question, Sullivan chose to restate. He said, why did Avaya not renegotiate with the company’s creditors and have a “pre-packed deal like Aspect?”
Aspect Software, an Avaya competitor, recently used the Chapter 11 systems in a process of “Deleveraging Its Balance Sheet.” In fewer than two months, Aspect successfully emerged from Chapter 11, crediting a “pre-arranged agreement.”
As to a plan for Avaya’s reorganization, Sullivan said, “The issue with us is that we have a very diverse set of debt holders. Many of them are passive. So, we had nowhere even close to having a majority of them involved in the discussion with us. We couldn’t get a majority together.”
Sullivan then added that the company intends to file a plan with the court sometime in March. He said there is confidence that “if we can get a certain momentum, with a certain number of our creditors agreeing, then the bankruptcy court can impose a solution. That’s why we decided that Chapter 11 was the right tool to use to get this done, and we are trying to get this done as soon as we can.”
Positive prognosis for Avaya
The bottom line out of this for me was an increased sense of confidence in Avaya’s future. In the terminology used by Warren and Westbrook, Avaya is no “corpse.” A look at recent financial reports from the company buoys Sullivan’s statement showing that although revenue is down, a fact that is true of many companies competing in Avaya’s industries, other measures—including “Non-GAAP operating income” and “Adjusted EBITDA”—for Avaya are hitting record levels.
Those impacted members of the ecosystems that surround Avaya can also hopefully take solace. The patient may be in “the Chapter 11 hospital,” but prognosis seems to be trending in the right direction. When the Avaya plan is revealed in March, based upon the research presented by Warren and Westbrook, the odds swing in Avaya’s favor.