Avaya seeks new ways to buy back convertibles

By : |February 19, 2003 0

MEXICO CITY: Avaya Inc. is looking for new ways to buy back about $400 million in convertible bonds after attracting few takers in a January swap offer, Chief Executive Don Peterson told Reuters. About 9 percent of Avaya’s convertible bonds, or Liquid Yield Option Notes (LYONs) due in 2021, were tendered in an exchange offer in January.

“We would still like to have that issue gone, so we’ll be looking ways to do something else. We could do another tender or do private transactions, or we could just wait for the put (option in 2004) and raise money and put it aside,” Peterson said in an interview at a telecommunications industry conference in Mexico City.

Avaya, a Lucent spinoff, was trying to exchange a substantial portion of the zero-coupon securities for either cash or a combination of cash and common stock, in order to cut debt and gain financial flexibility.

Avaya had expected about 40 percent to 70 percent of the LYONs would be tendered in January. But a strong rally in the credit market for telecommunications companies saw long-term debt rally substantially, so people did not tender, Peterson said.

“Contrary to where they were, which was heavily discounted …they are now apparently confident that we are going to be able to meet our obligation under these bonds,” he said. “Obviously they are very secure in our capital structure and our ability to meet our commitments — that’s the good news.”

He said the price tendered for was a yield to put of about 15 percent, and the convertible bonds had been trading at 18 percent and higher. Most felt that was not a high enough price so they didn’t tender, even after Avaya sweetened the deal once.

Peterson said Avaya wants to eliminate uncertainty over how the company will deal with the bonds by getting rid of them at a discount before the October 2004 put option. The option price at that time will be attractive enough that most holders are likely to tender and the company will have to come up with cash or stock.

“We don’t want people to anticipate the stock issuance. We want them to have confidence that we can pay it off in cash, which we believe we can, and that’s reflected in the rally price,” Peterson said.

$850 million debt

He said Avaya’s overall outstanding debt is now about $850 million, split equally between the convertible LYONs and an issue of straight debt that matures in about six years.”We’ve got $650 million in cash as of December 31, unused bank lines of $550 million and been generating cash in the business for each of the last several years, so I feel very confident we can meet our obligations,” he said.

Last November, rating agency Moody’s cut Avaya’s senior secured note rating to “B2” and senior unsecured convertible bond rating to “B3,” respectively its fifth- and sixth-highest “junk” grades, from “Ba2” and “Ba3.”

Peterson said Avaya was also planning to go ahead with a reverse-forward stock split designed to cash out some 2.5 million small shareholders and save the money spent in sending annual reports to all of them. The company ended up with millions of small shareholders who got Avaya stock when it was spun off from Lucent in 2000.

Avaya shareholders gave permission for the stock split last year, but the permission ran out while Avaya dealt with lawsuits over the way the split would have valued the stock.

Peterson said Avaya has won court rulings in its favor regarding the proposed split and will ask shareholders to renew authority for the split at an annual meeting next week.

Avaya shares slipped 10 cents, or 4.3 percent, to close at $2.25 on the New York Stock Exchange on Wednesday.

Latin America demand stabilising

Peterson said that after a couple of years of falling demand for telecommunications services in Latin America, the company sees demand stabilizing and set for growth perhaps later this year.

About 25 percent of Avaya’s revenues come from outside the United States, and Latin America is one of the company’s smaller regions. But he said in the last year the company saw revenues from Internet Protocol telephony double in Mexico. Internet Protocol telephony is a network service by which businesses can combine all their voice, data, messaging and wireless networks. Avaya has also expanded its call center business in Mexico, where it has a 40 percent market share, he said.

© Reuters

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