TEXT-S&P cuts Airvana Network Solutions to 'CCC-'

Tue Nov 20, 2012 12:47pm EST

Overview
     -- U.S. network infrastructure software provider Airvana reported steep 
year-to-date declines in revenue and EBITDA.
     -- The company's lawsuit, seeking a preliminary injunction against its 
sole customer, Ericsson AB, remains unresolved.
     -- We are lowering all our ratings on Airvana to 'CCC-' from 'CCC', 
reflecting Airvana's revenue and earnings vulnerability and weak liquidity. 
     -- At the same time, we removed the ratings from CreditWatch, where we 
placed them with developing implications on Feb. 9, 2012.
     -- The outlook is negative, reflecting the lack of resolution of the 
lawsuit, and our concern that Airvana may be unable to meet its obligations as 
they come due.

Rating Action
On Nov. 20, 2012, Standard & Poor's Ratings Services lowered its corporate 
credit and issue ratings on Chelmsford, Mass.-based Airvana Network Solutions 
Inc. to 'CCC-' from 'CCC'. The recovery rating on the company's senior secured 
debt remains '4', indicating our expectation of average (30%-50%) recovery in 
the event of a payment default.

In addition, we removed the ratings from CreditWatch, where we placed them 
with developing implications on Feb. 9, 2012. The outlook is negative.

Rationale
The downgrade reflects rapid declines in revenue and cash flow year to date, 
and lack of resolution of the legal proceedings against Ericsson, including 
ongoing uncertainty about potential proceeds from a settlement or judgment.

Airvana is dependent on Ericsson for essentially 100% of its revenues. Our 
ratings on the company reflect the ongoing lawsuit against its sole customer, 
and the related vulnerability of its future revenues and cash flows. 

Airvana filed suit against Ericsson in the Supreme Court of the State of New 
York on Feb. 8, 2012. The suit alleges that Ericsson violated key terms of its 
contract with Airvana and misappropriated Airvana's critical intellectual 
property, among other items. As a result, Airvana seeks from Ericsson damages 
of not less than $330 million and an injunction barring certain conduct by 
Ericsson. Airvana's "vulnerable" business risk profile reflects its declining 
revenue base and ongoing litigation against its sole customer.

Airvana, founded in 2000, provides mission-critical network infrastructure 
software products used by wireless operators to provide third-generation (3G) 
mobile broadband services. After a 2007 IPO, Airvana was taken private in 
April 2010 by a consortium of private-equity investors led by S.A.C. Private 
Capital. Airvana's sole customer, formerly known as Nortel Networks Corp., was 
acquired out of bankruptcy by Ericsson AB in November 2009.

Under generally accepted accounting principles (GAAP) requirements, Airvana 
defers all revenue from sales until all elements (product, software, and 
services) have been delivered, although customer billing and collections occur 
monthly. As a result, GAAP accounting is not representative of Airvana's 
operating performance; our analysis--and all further references to 
revenue--incorporates customer billings as a proxy for revenue.

We view Airvana's financial risk profile as "highly leveraged," and we assess 
Airvana's management and governance as "weak," based on our uncertainty 
regarding the sustainability of the revenues and cash flows. Billings and 
EBITDA in the September 2012 quarter were $46.8 million and $36.3 million, 
respectively, which were down 48% and 53%, respectively, over the same period 
in the prior year. Revenue declines during 2012 reflected rapidly declining 
investments and upgrades to 3G data equipment, as larger carriers divert 
capital expenditures toward next-generation 4G equipment and software. 
Last-12-month leverage as of September 2012 was 0.2x and the company's debt 
balance was $43 million, down from $184 million as of Dec. 31, 2011. However, 
given the lack of resolution of the lawsuit, Airvana may be unable to meet its 
obligations as they come due.

Liquidity
We view Airvana's liquidity as "weak" because of diminished operating 
performance and uncertainty related to future cash flows. Cash balances were 
$15.6 million as of Sept. 30, 2012. We see coverage of uses to be below 1x for 
the next 12 months. Our assessment of Airvana's liquidity profile incorporates 
the following factors:

     -- The company has satisfied annual term loan amortization requirements 
for fiscal year 2012, and substantially reduced the term loan balance.
     -- However, the company does not have a revolving credit facility.
     -- In addition, the company faces material tax liabilities in 2013, which 
it could not pay when due from current cash flow levels.

Recovery analysis
The rating on Airvana's senior secured debt is 'CCC-' (the same as the 
corporate credit rating), and the recovery rating is '4', indicating our 
expectation that lenders would receive average (30% to 50%) recovery if a 
payment default occurs. The issue-level rating recovery analysis on Airvana 
will be published separately on RatingsDirect.

Outlook
The negative outlook reflects the uncertain status of the litigation against 
Ericsson. The absence of a timely (before March 1, 2013) and favorable 
resolution could lead to lower a lower rating in the near term. We could also 
lower ratings in the near term if negative operating trends put Airvana's 
revenues, cash flow, and liquidity more at risk.

Related Criteria And Research
     -- Criteria For Assigning 'CCC+', 'CCC', 'CCC-', And 'CC' Ratings, Oct. 
1, 2012
     -- Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012
     -- Methodology And Assumptions: Liquidity Descriptors For Global 
Corporate Issuers, Sept. 28, 2011

Ratings List
Downgraded; Off Watch
                             To                 From
Airvana Network Solutions Inc.
 Corporate credit rating     CCC-/Negative/--   CCC/Watch Dev/--
 Senior secured              CCC-               CCC/Watch Dev
   Recovery rating           4                  4

Complete ratings information is available to subscribers of RatingsDirect on 
the Global Credit Portal at www.globalcreditportal.com. All ratings affected 
by this rating action can be found on Standard & Poor's public Web site at 
www.standardandpoors.com. Use the Ratings search box located in the left 
column.
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