Wednesday
Feb082017

Legally & Practically: What Avaya's Chapter 11 Means to Customers

As Avaya comes before the bankruptcy judge today in its second major court appearance since filing for Chapter 11 protection on Jan. 19, it's hoping that the final orders will be approved and "negotiations will begin in earnest," as Avaya's John Sullivan, VP or corporate treasury, shared with No Jitter Editor Beth Schultz (and she related to me). However, the company recognizes that the just-formed unsecured creditor group may request, and be granted, more time.

Either way, I figured it was time to brush up on bankruptcy law. For that, I turned to well-respected -- and very smart -- bankruptcy attorney Bill Brown of Phillips Lytle. My experience with bankruptcy law is limited (make that zero), and I knew I could learn a lot from him, which I did. Not only did he give me a thorough tutorial, but also a volume of documents that Avaya filed.

A Story to Tell
In reading the Avaya Chapter 11 documents, I did so with the awareness that their purpose is to tell a story and provide background for the bankruptcy judge and company shareholders. At a minimum, they provide a legal perspective on what the company is thinking, and how it hopes to resolve its current dilemma. But Let me start with some facts.

In the paperwork, Avaya (technically "Avaya Enterprises") described itself as a "global provider of contact center, unified communications, and networking products and services," and said it supports more than 200,000 direct and indirect customers. These customers consist of multinational enterprises, small and medium-sized businesses, and 911 services, Avaya stated. The company today comprises 176 different entities, only 18 of which fall under the Chapter 11 filing, as disclosed in the filed paperwork.

Avaya, as stated in the paperwork, is obligated (some might say "burdened") with $6 billion of secured debt. This debt includes, but is not limited to, $1.5 billion in underfunded liabilities from two employer-defined benefit pension plans, as well as other pension plans and post-employment benefits. Avaya has approximately 9,700 employees worldwide, 3,800 of whom work for the 18 debtor entities. Of this 3,800, only 550 are covered by collective bargaining agreements with the Communications Workers of America and the International Brotherhood of Electrical Workers. It is important to note that Avaya's non-U.S. affiliates (all 158 of them) are not debtors in these proceedings currently, and Avaya does not anticipate that they will be brought into the bankruptcy filing in the future.

The Avaya business comprises four slightly overlapping market segments: unified communications (58% of revenue), contact center (27%), networking (7%), and managed and outsourced communications support services (8%). As many knowledgeable communications professionals are well-aware, Avaya relies on direct and indirect sales models to generate income. Avaya has also placed significant value on its intellectual property, including approximately 5,400 patented products and services; licenses for the manufacture, use, and sale of its products; and copyrights and trademarks. All of which is to say, Avaya retains valuable assets. The question is whether or not the assets are sufficiently valuable -- and whether the strength of those products in the marketplace will be enough -- to enable the company to extract itself from its current predicament.

The Pulse of a Bankruptcy
Bankruptcy financing comes in two primary types: use of cash collateral, and debtor in possession (DIP) financing. Avaya has gone with the DIP approach, which is the typical preference of vendors. In this model, the debtor has continued access to credit for the purpose of funding its business following the filing, otherwise known as the "post-petition" period. This approach provides an assurance -- in other words, a vote of confidence, not a guarantee -- to Avaya customers and suppliers that the company should be able to pay its post-petition debt. Often in Chapter 11 bankruptcy cases, vendors will shorten up terms if they can in an effort to secure payment while simultaneously being acutely sensitive to the terms under which they'll continue to do business with the debtor.

While others have pointed out that time is of the essence in these cases (see Avaya Bankruptcy: Good or Bad for Customers?"), Avaya met with a chilly reception from the bankruptcy judge on its initial request, which came before the court the day after the Chapter 11 filing, to receive funds from a financing package that was approved prior to its filing. Such ups and downs are not unusual.

In fact, a bankruptcy is a little bit like watching a heart monitor. You have this initial peak and then a horizontal plane and then you have another peak," Phillips Lytle's Brown told me. "Right now, Avaya is still in the initial peak. The interim first day hearings have occurred. At that time, the bankruptcy judge granted some, but not all, of those interim requests."
As noted above, as of this writing the second-day hearing is imminent, but a ruling not a certainty. "At some point," Brown said, "... the court will consider the full amount of the proposed DIP financing, after creditors have had a chance to organize."

Advice for Avaya Customers
If your enterprise is relying on Avaya equipment and/or services, the best advice at this point is not to panic. Despite claims you may hear from competitors, it's far from time to abandon Avaya products and services -- particularly in the U.S. However, key indicators, particularly related to maintenance, repair, and overall service, will be critical in the next few months as the company attempts to right its own ship.

As Avaya has moved away from CapEx products in favor of OpEx items, careful vendor monitoring and management will provide just about the best indicator possible of how the reorganization is going and what the longer-term outcome will be. It's important to remember that the debt is significant, but not insurmountable, and that Avaya, which continues to create valuable products and services in the marketplace, remains an important player. Besides, there just might be a bargain to be had!

For more guidance on how to move forward in this time of uncertainty, see the recent post, "Avaya Users: Time to Build Your Contingency Plans," from UC consultant Steve Leaden. In addition, join Leaden and his co-panelist, attorney Andrew Brown, with LB3 Law, for an interactive breakout session at Enterprise Connect 2017, coming the week of March 27 to Orlando, Fla., on the status of Avaya. The session, Avaya Update: What Enterprises Need to Know Right Now," will take place Monday, March 27, at 2:00 p.m. to 3:00 p.m.

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