Relevant Documents:  
Plan
Disclosure Statement
Plan Scheduling Motion
DS, Solicitation Procedures Motion
Press Release

Last night, the Avaya Inc. debtors filed their plan of reorganization and disclosure statement. The plan does not appear to be premised on any specific settlements or agreements with stakeholders.

Under the plan:

• First lien claims (the cash flow credit facility and first lien notes) share pro rata $1.418 billion (in cash or, in some circumstances, new debt) and 95% of the company’s reorganized equity, subject to dilution by a 10% MIP.
• Second lien claims are to receive 5% of the reorganized equity, also subject to dilution by the MIP.
• General unsecured claims will share a $25 million cash pool with recoveries for GUCs capped at 10%.

Second lien claims are estimated by the DS to recover 11.4% and the first lien claims are estimated to recover 100.4%. Additionally, the debtors’ valuation report, which was produced by the debtors’ financial advisor Centerview, indicates that the mid-point reorganized enterprise value, including IP assets, is $6.1 billion.

As part of the plan’s funding, the debtors propose a new syndicated bank facility in the total amount of $1.418 billion as well as a separate $500 million senior secured exit facility. Few details regarding the facilities have been included in the documents. With respect to the syndicated facility, the debtors will attempt to syndicate the debt or will issue the debt to holders of the cash flow credit facility and first lien note claims in the event that the syndication is unsuccessful.

The plan is structured to assume and honor a number of domestic pension and OPEB obligations. Separately, the plan will assume and honor a “comfort letter” issued in connection with a non-debtor pension plan in Germany.

A number of other issues are also described in the DS and are said to have been factored into the debtors’ development of the plan. According to the DS, the debtors’ analysis included “asserted rights to default interest,” value allocation between the debtors and their international affiliates and “the extent to which value attributable to the Avaya Enterprise’s international operations could be available for distribution to unsecured creditors.” This last point appears to relate to a number of large intercompany obligations owing to Avaya Inc. that are subject to the liens of prepetition lenders. As discussed below, the DS notes that to the extent such obligations were recharacterized or disallowed, such value might flow to unsecured creditors.

According to the DS, factors taken into account by the Debtors include “the potential treatment of intercompany claims as Claims and/or value, if any, attributable to such intercompany relationships, and the potential impact of the marshaling waiver arising under Paragraph 13 of the Final DIP Order” as well as the time and expense required to litigate such issues.

The DS further notes that the debtors are still conducting their “retained claims collateral analysis” under the DIP order. This investigation relates to potential carve-outs from the DIP collateral with respect to, among other things, certain accounts, “all intellectual and similar property of every kind and nature now owned by the Debtors,” savings and benefit plans, tort claims, insurance policies, certain real property and certain leased property.

The hearing for approval of the disclosure statement is scheduled for May 25 at 10 a.m. EDT, with objections due May 18 at 4 p.m. EDT.

The debtors separately propose a 76-day timeline for litigation of the plan, leading to an Aug. 10 confirmation hearing. Under this schedule, July 26 would be the objection deadline with replies and briefs in support due Aug. 4. Under the debtors’ proposed solicitation procedures, the voting record date would be May 25 and votes would be due July 27

Treatment of Classes of Claims

Below is a chart of the plan’s classes, along with their estimated allowed amount, estimated recovery, impairment status and voting rights.
 

Treatment of Claims and Interests

The debtors’ plan sets forth the following classification of and proposed distributions to holders of allowed claims and interests:
 

• DIP Financing Claims: Estimated at $727 million. Paid in full, in cash on the effective date. 100% estimated recovery. Unclassified.
• Class 1 - Other Priority Claims: Paid in full, in cash on the effective date or when otherwise due; 100% estimated recovery; unimpaired, deemed to accept. 100% estimated recovery, presumed to accept.
• Class 2 - Other Secured Claims: Either (i) paid in full, in cash on the effective date or when otherwise due (ii) reinstated or (iii) other treatment that will leave the claim unimpaired; 100% estimated recovery; unimpaired, deemed to accept.
• Class 3 - Cash Flow Credit Facility Secured Claims: Allowed in the aggregate amount of $3.235 billion. Recoveries are shared ratably with the first lien notes secured claims and in each case without duplication among debtors, as follows: (i) 95% of reorganized holdco common stock, subject to dilution by the MIP and (ii) $1.418 billion of cash proceeds from the syndication of the new debt facility (or a dollar-for-dollar amount of new debt to the extent the facility is undersubscribed). 100.4% estimated recovery, impaired, entitled to vote.
• Class 4 - First Lien Notes Secured Claims: Allowed in the aggregate amount of $1.299 billion. Recoveries are shared ratably with the cash flow credit facility secured claims and in each case without duplication among debtors, as follows: (i) 95% of reorganized holdco common stock, subject to dilution by the MIP and (ii) $1.418 billion of cash proceeds from the syndication of the new debt facility (or a dollar-for-dollar amount of new debt to the extent the facility is undersubscribed). 100.4% estimated recovery, impaired, entitled to vote.
• Class 5 - Second Lien Notes Claims: Allowed in the aggregate amount equal to $1.384 billion, plus any accrued but unpaid interest as of the petition date. Recovery is 5% of reorganized holdco common stock, subject to dilution by the MIP. 11.4% estimated recovery, impaired, entitled to vote.
• Class 6 - U.S. Qualified Pension Claims: Estimated at $125.2 million. To be reinstated with the unpaid portion of minimum funding contributions due with respect to the plan plus any accrued but unpaid interest at the Federal Judgment Rate “paid into the pension trust.” 100% estimated recovery, impaired, entitled to vote.
• Class 7 - General Unsecured Claims: Estimated at $250 million. Will share pro rata distributions in cash from the general unsecured recovery pool, which totals $25 million in cash, with recoveries not to exceed 10% of a holders’ allowed general unsecured claim. 10% estimated recovery, impaired entitled to vote.
• Class 8 - Prepetition Intercompany Debtor Claims: Defined as “any Claim held by a Debtor against any Debtor” and no estimated amount provided. To receive unimpaired treatment. 100% recovery, deemed to accept. (NOTE: postpetition intercompany debtor claims are treated as administrative expenses).
• Class 9 - Subsidiary Claims: Defined as “any Claim of a non-Debtor subsidiary of Avaya Inc. against any Debtor” and no estimated amount provided. To receive unimpaired treatment. 100% recovery, deemed to accept.
• Class 10 - Section 510(b) Claims: Canceled, deemed to reject.
• Class 11 - Intercompany Interests: Either reinstated or canceled (at the election of the debtors), deemed to reject.
• Class 12 - HoldCo Interests: Canceled, deemed to reject.

Pension Issues

In addition to the plan’s treatment of U.S. Qualified Pension Claims in class 6, the plan provides that OPEB and workers comp programs will continue to be honored in accordance with their terms. The DS reports “as of December 31, 2016, the Debtors’ unfunded OPEB liability totaled approximately $259 million, with annual expenditures by the Debtors with respect to such benefits averaging approximately $38 million in the aggregate over the last three fiscal years.”

Further, the debtors’ collective bargaining agreements shall be deemed executory and assumed, with all proofs of claim filed for amounts due under the CBAs “considered satisfied by the agreement and obligation to assume and cure in the ordinary course as provided herein.”

A separate “Avaya Inc. Supplemental Pension Plan” is to be “discharged” as a general unsecured claim according to the DS (with a footnote saying that claims arising from the discharge will be added to the debtors’ schedules), however, the plan itself appears to exclude from the definition of general unsecured claims those claims arising from or related to the supplemental plan. The supplemental plan is a “a non-qualified plan established for purpose of providing an unfunded excess benefit plan and providing deferred compensation and supplemental pension benefits for purposes of ERISA” and is the successor to a Lucent Technologies supplemental pension plan. The ASPP is not insured by PBGC and as of the petition date, approximately 830 individuals were beneficiaries of the plan, according to the DS.

With respect to intercompany international pension obligations, the DS reports that non-debtors Avaya GmbH & Co. KG (“Avaya KG”) and Avaya Deutschland GmbH (“Avaya Deutschland”) sponsor pension plans for approximately 1,200 employees. This plan relates to the 2004 acquisition of Tenovis. According to the DS:
Further, according to the DS, “Avaya KG benefits from credit support in the form of a ‘comfort letter’ dated as of March 16, 2016 through which AISL, a non-debtor Irish subsidiary of Avaya, agreed to provide certain support for Avaya KG’s financial wherewithal. AISL, in turn, is the beneficiary of a similar comfort letter issued by Avaya” (emphasis added). A footnote adds “[n]o such comfort letter has been issued in support of Avaya Deutschland, although an identical comfort letter was issued in support of Avaya Germany GmbH, a parent company of Avaya KG and Avaya Deutschland.”

According to the DS, the reorganized debtors “shall assume the AISL Comfort Letter and honor all AISL Comfort Letter Obligations in accordance with applicable non-bankruptcy law, and the Reorganized Debtors reserve all of their rights thereunder.”

A number of other intercompany comfort letters are to be assumed and honored under the plan.

Intercompany Claims Owing to Avaya

The DS also describes in particular three intercompany receivables owing to Avaya:
 

• Sierra Communication International LLC, a non-operating holding company that is parent to a “substantial majority” of the Avaya’s international subsidiaries, is party to a note in favor of Avaya, which as of the petition date had a nominal balance outstanding totaling approximately $1.2 billion. The note “reflects the recordation of various intercompany transfers by Avaya to various non-Debtor subsidiaries” and is “pledged as collateral in support of the Debtors’ prepetition funded debt obligations.”
• A receivable due to Avaya from Avaya Holdings Ltd. totaling approximately $518 million reflecting, among other things, “costs incurred by AHL on account of certain cost sharing arrangements between AHL and Avaya.”
• A receivable due to Avaya from AISL totaling approximately $128 million, reflecting, among other things, “the transfer pricing arrangement undertaken between AISL and Avaya.”

How the plan accounts for these assets of Avaya Inc. is not entirely the clear. The DS does, however, describe the potential for an inter-creditor dispute with respect to how they are treated, it reads:
As noted above, the DS indicates that the current iteration of the plan accounts for the debtors’ analysis of this issue.

Other Plan Provisions

According to the DS, the reorganized holdco stock will not be listed on a public exchange.

The plan includes a MIP in the bracketed amount of 10% of reorganized holdco common stock, with few additional details provided with respect to the MIP.

The plan provides for releases of (a) the debtors, (b) the reorganized debtors, (c) each of the debtors’ estates and (d) the shareholders. Shareholders are defined as “each of the current and former Holders of HoldCo Interests” (emphasis added). Releasing parties include those that voted for the plan or are deemed to accept the plan. Exculpated parties include the debtors and the members of the UCC.

All non-released claims and causes of action are to be preserved and retained for the reorganized debtors.

Valuation Analysis

The debtors’ disclosure statement includes a hypothetical valuation analysis. The disclosure statement notes that the estimated value of the Avaya Enterprise for purposes of the debtors’ waterfall analysis excludes intellectual property. This enterprise value, excluding IP, is stated to have been used to determine recoveries to allowed claims under the debtors’ financial advisor’s waterfall analysis with the enterprise value plus estimated IP value representing the estimated total value of the enterprise.

Centerview estimates that the enterprise value, including IP, falls within a range of $5.1 billion to $7.1 billion with a midpoint of $6.1 billion. Based on assumed debt at emergence of $2 billion, cash of $350 million, capital leases of $31 million and tax-effected pension and OPEB liabilities of $1.1 billion, and “after application of the settlements and compromises set forth in article III of the disclosure statement,” the implied range of value for the reorganized common stock is $2.3 billion to $4.3 billion, with a midpoint of $3.3 billion.

Houlihan Lokey conducted a separate valuation of the debtors’ intellectual property reviewing, among other things, Avaya’s issued and pending utility patents, data relating to the company’s patent portfolio and reviewing public data for market sizing, patent applicability and royalty rates. This IP analysis is stated to be specific to the debtors’ patent portfolio and focused on analyzing the patents as a source of value and potential revenue. The disclosure statement does not include a specific valuation amount assigned to the patents.

Financial Projections

The debtors’ management team provided financial projections through fiscal year 2021. The projections, excerpted below, include a “Non-GAAP P&L” chart and a “Cash Flow Metrics” chart.

Non-GAAP P&L

The projections include decreases in revenue in fiscal year 2017, 2018, and 2019 with slight revenue growth thereafter and estimate fiscal 2017 adjusted EBITDA of $777 million.
Cash Flow Metrics

The cash flow metrics include line items for pension/OPEB payments which decrease from $192 million in fiscal year 2017 to $101 million in fiscal year 2021 and include proceeds from IP monetizations of $125 million, projected to occur in fiscal 2018.