TEXT-S&P rates Avaya's term loan, secured notes 'B'

Tue Dec 18, 2012 10:54am EST

-- U.S. telecommunications solutions provider Avaya Inc. has proposed a 
term loan B-5 due 2018 and the issuance of secured notes due 2019. The 
proposed debt will refinance and extend maturities for a portion of Avaya's 
outstanding B-1 term loan due 2014. 
     -- Standard & Poor's Ratings Services assigned both the term loan and 
notes its 'B' issue rating with a recovery rating of '2'. In addition, we are 
affirming our 'B-' corporate credit rating on the company.
     -- The stable rating outlook reflects our view that the company's 
operating trends will begin to stabilize during 2013.

Rating Action
On Dec. 18, 2012, Standard & Poor's assigned Basking Ridge, N.J.-based Avaya 
Inc.'s proposed term loan B-5 due 2018 and proposed secured notes due 2019 its 
issue-level rating of 'B' (one notch higher than our 'B-' corporate credit 
rating on the company) with a recovery rating of '2', indicating our 
expectation of substantial (70%-90%) recovery for lenders in the event of a 
payment default.  The B-5 term loan will amend and extend a portion of the 
company's B-1 term loan due 2014. The proposed secured notes will refinance a 
portion of the B-1 term loan. Both the notes and the loan have a springing 
maturity of July 2015, conditioned on net leverage, the occurrence of an IPO, 
or repayment or refinancing of at least $750 million of outstanding notes due 
2015.

In addition, we are affirming our 'B-' corporate credit rating on Avaya, with 
the expectation that the company's operating trends will begin to stabilize 
during 2013 and that it will make progress over the coming year in addressing 
its maturity profile for 2014-2015. The rating outlook is stable. All existing 
issue-level ratings on the company's debt also were affirmed, and the existing 
recovery ratings on this debt remain unchanged. We note, however, that our 
recovery estimates are currently at the low end of their respective recovery 
ranges. In the event of a modest diminution of our recovery estimates, our 
issue ratings on the company's secured debt could be lowered to the same level 
as or below the corporate credit rating, and the issue ratings on the senior 
unsecured debt could be lowered to two notches lower than the corporate credit 
rating.

Rationale
Avaya reported a 7% year over year revenue decline and negative free cash flow 
of $84 million for the 12 months ended September 2012. Although the September 
quarter marked the third consecutive quarter of year-over-year top-line 
declines, we expect that revenues will begin to stabilize during 2013, 
supported by recent restructuring initiatives, as well as the company's recent 
resolution of certain product quality issues.

We assess Avaya's business risk profile as "weak," based on the company's 
challenge to reestablish consistent growth in its core markets of enterprise 
communications. We note that revenue trends have been volatile over the past 
several years due to competing technologies, sluggish economies, deferred 
technology purchases by the U.S. government, and company-specific product 
quality miscues, which collectively contribute to its lackluster revenue 
performance. The company's solid position in the customer premises 
communications industry, as well as a good base of recurring services and 
maintenance revenues, however, somewhat offset these weaknesses.

We expect EBITDA for the next 12 months to be flat to slightly up from $810 
million for the 12 months ended Sept. 30, 2012, which treats certain 
restructuring charges as operational expenses. Free cash flow is likely to 
remain negative over the next 12 months, as we expect earnings growth to 
remain elusive and as residual restructuring charges related to rightsizing 
operations continue, albeit below prior-year levels.

We consider the company's financial risk profile to be "highly leveraged" and 
we view Avaya's management and governance as "fair." Leverage for the company 
is very high, at about 9.3x for the 12 months ended Sept. 30, 2012, including 
underfunded pension adjustments and operating lease adjustments. Avaya had 
about $1.8 billion underfunded pension obligations at Sept. 30, 2012, up 
slightly year over year.

Liquidity
We believe Avaya has "adequate" liquidity over the next 12 months. On Sept. 
30, 2012, cash amounted to $337 million and the company had collective 
availability of about $450 million under revolving credit facilities due 2016. 
We expect cash uses to include about $450 million of cash interest expense 
(which increases modestly pro forma for the current debt offering), $120 
million of capital expenditures, $170 million of pension funding, and about 
$150 million of cash restructuring costs over the coming 12 months.

We believe that current cash balances, coupled with access to existing lines 
of credit, are adequate to support operations, despite our view that 
discretionary cash flow is likely to remain modestly negative over the next 12 
months. Beyond that time frame, maturities present a continuing challenge that 
the current proposed issues will mitigate. Following this transaction, roughly 
two-thirds of the company's funded debt matures during 2014 and 2015, absent 
satisfaction of covenant conditions to extend maturities.

Other factors in our liquidity assessment include:
     -- Our expectation that cash sources will exceed uses by 1.2x for the 
next 12 months, and that net sources will be positive in the near term, even 
with a 20% decline in EBITDA;
     -- Avaya's benefit from the absence of performance covenants throughout 
its capital structure; 
     -- The company has no significant debt maturities until October 2014; and 
     -- An expectation for continued modest cash-funded acquisition activity. 

Outlook
The rating outlook is stable. We expect that restructuring charges will 
diminish over the coming year, EBITDA growth will resume from current levels, 
and that the company will revive a path toward positive free cash flow and be 
positioned to continue to address its 2014-2015 maturity profile.

A downgrade would likely be the result of a sustained deterioration in 
operating trends, causing EBITDA generation to decline, free cash flow to 
remain negative or weak, or cash balances to erode below $200 million, which 
would heighten refinancing risk for the 2014-2015 maturities. We will not 
consider an upgrade until Avaya has considerably reduced leverage, to a 
debt-to-EBITDA level of below 7x on a sustained basis, and makes further 
progress in addressing its maturity profile beyond this coming year.

Related Criteria And Research
     -- Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012
     -- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
     -- Criteria Guidelines For Recovery Ratings, Aug. 10, 2009
     -- Standard & Poor's Revises Its Approach To Rating Speculative-Grade 
Credits, May 13, 2008
     -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
     -- 2008 Corporate Criteria: Rating Each Issue, April 15, 2008


Ratings List

Ratings Affirmed

Avaya Inc.
 Corporate Credit Rating            B-/Stable/--
 Senior Secured                     B
   Recovery Rating                  2
 Senior Unsecured                   CCC+
   Recovery Rating                  5

New Ratings

Avaya Inc.
 Secured term loan B-5 due 2018     B
   Recovery Rating                  2
 Secured notes due 2019             B
   Recovery Rating                  2
 


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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