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At emergence Avaya is expected to have $350 million in cash. Pension Obligation Reduction: As part of the reorg, the company is expected to shed approximately $0.9 billion in liabilities related to certain domestic pensions. In addition to the pension obligation reduction, the company will eliminate an estimated average of $60 million annually in minimum required https://www.canadagoosediscount.co.uk pension contributions through fiscal 2021. In return for the reduction in the uk canada goose outlet pension liabilities, the Pension Benefit Guarantee Corporation will receive $340 million in cash and a 5.5% stake in the company. Significant Leverage Reduction: Fitch estimates total leverage will be reduced considerably, from 7.9x at the end of fiscal 2016 to 4.4x in fiscal 2018, the last reported period prior to the Chapter 11 filing. The reduction in debt and pension liability, as well as the latter’s minimum required contributions have materially increased Avaya’s financial flexibility. Potential for Improved FCF Generation: On a pre petition basis, Avaya’s FCF generation was relatively inconsistent over the previous four fiscal years. FCF declined to $17 million in fiscal 2016 from $91 million for fiscal 2015. Fitch estimates FCF for fiscal 2017 (ended Sept. 30, 2017) was in the $125 million $175 million range and could average $250 million $300 million annually thereafter. Post emergence FCF will benefit from the reduction in cash interest expense due to lower debt and by the elimination of an average of $60 million in estimated annual minimum required pension contributions. Business Restructuring: While in bankruptcy, Avaya sold its networking business in a sale that closed in July 2017. The networking business contributed approximate $251 million in revenue in fiscal 2016, but was not a positive contributor to EBITDA. Unified Communications Segment Challenges: From a revenue perspective, the unified communications (UC) segment faces challenges given the ongoing decline in revenue from legacy hardware and endpoints (phones, desksets, etc.), which also affects maintenance revenue. The relatively stable sales of NextGen software partly mitigate the effects of the legacy revenue declines within the UC segment. Recurring Revenue from Service Contracts: Approximately 55% of total revenue as of the LTM ending June canadian goose jacket 30, 2017 is derived from service contracts with contract tenures of one to five years; for fiscal third quarter 2017 (3Q17) it was 58%. Broad Distribution Network: Avaya’s indirect channel, with approximately 6,300 Canada Goose UK Outlet partners at the end of fiscal 2017, extends the company’s sales reach to more than 180 countries worldwide. Approximately 73% of canada goose black friday sale total product revenue during the nine month period end ended June 30, canada goose factory sale 2017, was through indirect canada goose clearance sale channels. Diversified Revenue Base: Avaya’s revenue base is diversified from a customer, geographic and industry perspective. Avaya had more than 130,000 customers in mid 2017, including 90% of the Fortune 100 companies. during Canada Goose Coats On Sale the same nine month period. Recovery Rating (RR) Assumptions: The recovery analysis assumes the enterprise value of Avaya is maximized in a going concern scenario versus liquidation. Fitch contemplates a scenario in which default may be caused by disappointing sales of the company’s on premise Contact Center offering along with continued secular pressure in UC. As a result, Avaya would likely invest in aggressive development and roll out of a reinvigorated cloud based contact center offering. Fitch believes the renewed strategy would result in a revenue decline from the transition to subscription software sales as well as EBITDA margin pressure from increased sales and R investments. Under this scenario, Fitch estimates a going concern EBITDA of $500 million, which is approximately 25% below LTM 3Q17 EBITDA of $666 million. Fitch assumes Avaya will receive a going concern recovery multiple of 5x EBITDA under this scenario. canada goose The 5x multiple compares to the expected bankruptcy exit multiple for Avaya of 8.1x, an M multiple of 9.0x for Nokia’s acquisition of Avaya peer Alcatel Lucent, as well as a median multiple of 8.0x for public comparable companies including Cisco, Juniper, IBM and Synchronoss. Fitch assumes the $300 million secured ABL is to be fully drawn at the time of default and a 10% administrative claim through a restructuring. Fitch forecasted going concern EBITDA of $500 million and recovery multiple of 5.0x results in a post reorganization enterprise value of $2.25 billion, after the deduction of expected administrative claims and the assumed ABL drawn amount, resulting in 81% recovery for the $2.425 billion first lien senior secured term loan, which allows for notching of +2 from buy canada goose jacket cheap the IDR of ‘B(EXP)’ to ‘RR2’ and a 9% recovery for the $500 million second lien term loan, which allows for Canada Goose online notching of 2 from the IDR of ‘B(EXP)’ to ‘RR6’. DERIVATION SUMMARY The global UC industry has historically exhibited moderate concentration with the top three vendors, Cisco Systems, Inc., Avaya Inc. and Microsoft Corporation (AA+/Stable), maintaining a 55% 60% combined market share, while additional competitors including Alcatel Lucent (subsidiary of Nokia Corp.) and Mitel Networks Corp. maintain high single digit market shares. Recent trends such as the entry of cloud based competitors as well as hardware product commoditization have presented significant challenges to these legacy UC vendors. Cisco consistently refers to declining UC hardware sales in earnings discussions while Alcatel Lucent considers canada goose coats on sale UC product as non strategic. Microsoft has largely been insulated from these pressures, having pursued a differentiated approach that centers on integration of third party UC hardware into the company’s enterprise software offerings. In contrast, Avaya has experienced sharp declines for UC product sales, to $1.2 billion in FY16, 27.4% below FY14. Management is forecasting a continued decline of 16.4% per annum through FY20. As a result, Avaya’s market share among its immediate competitors has declined from approximately 25% in 2010 to 15% in 2016. The Contact Center (CC) market has similarly been dominated by the leading vendors including Avaya, Cisco and Genesys Telecommunications Laboratories Inc., which maintained a combined market share of approximately 60%. The CC market has also been disrupted by emerging trends including closer integration of contact center functionality with CRM functions, as well as the entry of cloud based competitors. In contrast to the UC market, legacy CC vendors have been able to avoid revenue pressure as enterprise customers have continued to prefer traditional on premise solutions. However, cloud based offerings have generated strong growth in SMB and midmarket segments and are gradually beginning to penetrate enterprise clients as well. This trend may accelerate as demonstrated by Cisco’s acquisition of cloud contact center provider, Broadsoft, Inc. Avaya’s primarily Canada Goose Jackets on premise offerings have allowed the company to generate continued CC product revenue growth of 3.4% per annum with management forecasting growth of 4.6% per annum through FY20. However, lack of cloud product has caused the company to miss out on higher growth opportunities and presents a risk of eventual share loss to cloud providers if cloud successfully penetrates enterprise segments. Avaya’s ratings reflect the company’s historically strong market position as a top three provider in target markets in addition to an improved credit profile with significantly reduced interest expense and pension obligations upon emergence from Chapter 11. The ratings are limited by secular challenges, rapid revenue decline and market share loss in the UC segment, and uncertainties in CC segment growth uk canada goose given lack of an aggressive cloud strategy. KEY ASSUMPTIONS Fitch’s key assumptions within our rating case for the issuer include: Bankruptcy: Emergence from bankruptcy as contemplated under the current Plan of Reorganization with a $300 million undrawn canada goose uk black friday ABL, a $2.425 billion senior secured first lien term loan and a $500 million second lien term loan; Revenue: $3 billion in FY17, consistent with management forecasts; 10% decline in FY18 driven by rapid decline in UC and reduced retention rates, partially offset by strong growth in CC as emergence from bankruptcy releases pent up demand; 6% and 4% declines in FY19 and FY20, respectively, driven by continued declines in UC, offset by improving retention rates and 2% product growth in Contact Center segment due to lack of cloud based offering; Margins: EBITDA margin range of 23% 25% driven by increased investment in cloud offerings leading to reduced gross margins and increased R spend, partially offset by cost reductions in SG Capex: Capital intensity of 3% due to investment in hosted infrastructure; Debt: Cumulative debt repayments of $460 million in FY18 FY20 due to excess cash flow sweep provision and term loan amortization. RATING SENSITIVITIES Future Developments That May, Individually or Collectively, Lead to Positive Rating Action Improvement in the outlook for revenues for the company including positive revenue growth, expansion of margins due to continued cost reduction efforts and success in newer market areas, including cloud services. Strong FCF with FCF margins in the low double digits. Leverage below 4x Future Developments That May, Individually or Collectively, Lead to Negative Rating Action Continued deterioration in revenue expectations beyond the forecast horizon, combined with margin pressure. Leverage sustained above 5.5x. LIQUIDITY Adequate Liquidity on Emergence: Fitch expects Avaya to have adequate liquidity on emergence from bankruptcy. The plan calls for the company to emerge with $350 million in cash and an undrawn $300 million ABL facility. Fitch estimates an FCF range of $250 million $300 million in FY2018. As an outcome of the bankruptcy process, approximately $170 million in cash flow savings will arise from lower interest expense and, to a lesser extent, reduced pension costs. The proposed debt structure, in addition to the revolving credit facility, includes a $2.425 billion new first ien term loan that has a 7 year maturity and it will amortize at 1% annually. There will also be $500 million of new second lien notes, with a term in the 7.5 8 year range. Near term maturities are nominal and consist of the approximately $24 million of annual amortization on Canada Goose Outlet the $2.425 billion first lien term loan. Total funded debt and committed capacity expected under the plan of reorganization is expected to consist of: $300 million ABL due 2022, to be undrawn at close; $2.425 billion senior secured first lien term loan due 2024; and $500 million secured second lien term loan due 2025. FULL LIST OF RATING ACTIONS Fitch has assigned the following ratings: Avaya Inc. Long Term Issuer Default Rating (IDR) of ‘B(EXP)’; Outlook Stable; Senior secured first lien rating of ‘BB /RR2(EXP); Secured second lien rating of ‘CCC+/RR6(EXP). Contact: Primary Analyst John Culver, CFA Senior Director +1 312 368 3216 70 W Madison St. Chicago 60602 Secondary Analyst Chaim Kurland Associate Director +1 212 908 0281 Committee Chairperson David Peterson Senior Director +1 312 368 3177 Date of Relevant Rating Committee: October 25, 2017. Summary of Financial Statement Adjustments Financial statement adjustments did not depart materially from those contained in the published financial statements of the relevant rated entity or obligor. 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FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. canada goose store Telephone: 1 800 753 4824, (212) 908 0500. Fax: (212) 480 4435. Reproduction or retransmission in whole or in part is prohibited except by permission. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. 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