(Bloomberg) - Investors fuming over the rapid collapse of a leveraged loan issued in June have hired a law firm to examine legal options over what they view as inadequate disclosures during the debt’s marketing process.
The loan, issued by technology company Avaya Holdings Corp., plunged nearly 30 cents on the dollar over the last week after the company slashed quarterly revenue and earnings expectations and jettisoned its chief executive officer. The rapid change in Avaya’s fortunes -- revealed mere weeks after the debt hit investors’ accounts -- left some buyers questioning why the information wasn’t disclosed when Avaya was marketing the deal with help from Goldman Sachs Group Inc. and JPMorgan Chase & Co.
Investors who bought the company’s $350 million incremental first-lien leveraged loan have hired law firm Akin Gump Strauss Hauer & Feld to explore their options, according to people with knowledge of the matter, who asked not to be named discussing a private transaction. Some holders of the company’s other first-lien loans have also joined the group, the people said.
Representatives for Avaya, Goldman Sachs and JPMorgan declined to comment. A representative for Akin didn’t respond to requests for comment. LevFin Insights earlier reported on Akin’s hire, and other elements of the situation.
Struggling Sale
Avaya, which offers communications software and services and competes with the likes of Cisco Systems Inc. and Microsoft Corp., wasn’t an easy sell in the leveraged loan market. The company needed to raise money to refinance convertible bonds due in 2023 that were deeply out-of-the-money. It brought the deal in a market weakened by recession fears, inflation and rising interest rates, after previously trimming its full-year earnings forecast.
Investors balked at a proposed $500 million leveraged loan, forcing the company to split the planned issuance into a smaller loan and $250 million of privately-placed exchangeable notes, both secured on a first-lien basis. To get the deal done, Avaya agreed to hike the interest rate on the loan to 10% over the Secured Overnight Financing Rate -- the highest margin of the year -- include an upfront fee, and add other investor protections.
JPMorgan and Goldman priced the debt on June 24. New investor Brigade Capital Management bought a $125 million chunk of the new exchangeable notes, one of the people said, while multiple investors purchased the rest, according to a July regulatory filing. A representative for Brigade declined to comment.
Barely a month later, on July 28, Avaya said it was slashing its forecasted adjusted earnings for the third quarter by more than 60%, to between $50 million and $55 million. It also cut its revenue expectations by over 16%.
Even more concerning to some investors, Avaya removed its CEO, James Chirico, and replaced him with Alan Masarek, former head of Vonage Holdings Corp. Hiring a new chief executive typically takes weeks or months, raising questions about why the company didn’t disclose the transition during the June debt offering, some of the people said.
The news sent Avaya’s new term loan falling to quotes in the 60s as of Tuesday, different people said, from around 89 to 90 cents on the dollar. Its shares and other debt also plunged.
Now, investors await the company’s full earnings release on Aug. 9. In the meantime, Avaya’s share price closed Tuesday around 82 cents, a potential threat to the company, which must maintain a $1 share price over a 30-day trading period to remain listed on the New York Stock Exchange. Under terms of its new exchangeable notes, Avaya must be listed on the NYSE or Nasdaq, according to a Friday report from S&P Global Ratings.
The credit grader lowered its rating on Avaya two steps to CCC, saying the company may struggle to maintain the listing requirements or seek to restructure its debts.
(Updates with graphic of stock price.)
By Paula Seligson and Rachel Butt
