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Comment by keytapper | Hacker News Reader

I have been working at avaya for the last couple years and I have been scratching my head trying to understand how this company works and how it got into this situation. On one hand its a company thats hasn't made a profit in 10 years but on the other it takes in a billion every quarter. When you look at the numbers it turns out it is paying tens of millions to service the interest on its massive debt... it would be quite profitable if it was not for this. So where did the debt come from? Most of it seems to have come from the leveraged buyout it underwent 10 years back. So now they file for chapter 11 bankruptcy but who is getting burned here? Anyone who bought an avaya bond will lose out but what about the private equity company that owns the place? The way the company was allowed to grow its debt seems like they just didnt care as if it wasnt going to hurt them when bankruptcy finally beckons.

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By definition, the more leveraged the company, the more of it is owned by creditors. So if the company later does go belly-up, it is the creditors (banks, bondholders, etc.) who lose most on a percentage basis.

This simplistic analysis however ignores that before the buyout the company might have been a prosperous self-sustaining entity fully capitalized by common stock with little debt. That common stock, made into a small percentage of the capital structure by the buyout, is often wiped out too in the event of bankruptcy - indeed it is usually at the bottom of the totem pole in that capital structure. So although they may no longer be majority owners, bankruptcy is typically an unhappy event for long-time stockholders of the company such as founders, employees holding company stock in their 401ks, etc.

Perversely this is the kind of company PE outfits typically go after - in their worldview it is a waste of leveraging potential not to apply debt to such a company. I recommend reading "Barbarians at the Gate" if you are interested in this topic.

Thanks for your insight, I will check out your recommendation. As is the case with most things in finance, I'm sure if I scratch the surface there is a fairly straight forward explanation as to why things worked out the way they did. It is amazing how you can work at a place where the owners interests and the leadership goals might not be aligned to what you thought they were. There was a strange situation some months back where by the board filed a notice that if the company was bought they would each get juicy bonuses and even bigger ones if they were fired by the new owners. That was an interesting one.

As striking as it is for a company to take in a billion every quarter and still fail to make a profit, it is all to common in the telco space. I know from experience at one of the big 4 wireless carriers in the US. The inefficient mismanagement and spending decisions, specifically related to operations were astounding.

I started a company (shameless plug: fifthsignal.com) that makes software to fix a lot of the inefficiencies we saw. One of our biggest concerns was whether or not other carriers operated as poorly as what we had experienced. After talking with several carriers outside of the US, it would seem that most are actually worse off.

I believe someone in this thread made a comment towards the "legacy" telco space. Based on my experience, I would say it's a "dinosaur" industry that has seen very little delivered innovation in recent times.

*Most of my experience relates to operations/OSS solutions, with very little insight into telco BSS space.

But that's not the problem here, as everyone is explaining. The problem is that they are wasting all their money paying massive interest on massive debt. One of those times that a business gets caught up in tie same cycle as is usually reserved for people. It's quite treasonous and the first things to get hacked are decents who are just trying to get by.

Hey, plenty of experience in the gsm telecoms space. Currently doing some consulting with telecom co's shoot me a mail username at ZyeLabs.net. see how we can colab. Could refer you to some guys. One of our clients wanted to do a POC to pull logs from the RAN side into Hadoop but the vendors like Huawei and ZTE keep their kit locked down. Even refusing to supply spec on file formats.

Based on what you described (that they have operating earnings coming in the door) this sounds like a good reorg case. Whatever they did to take on so much debt the debt service cost is no longer sustainable by the business. In this case when they require new funding (to pay off maturing debt or just to keep the business operating because suppliers/banks etc are no longer willing to extend credit) the new capital providers (in this case affiliates of Citi) would typically demand that they file for bankruptcy first, because the new lenders don't want to comingle their capital with the existing lenders. Funding provided post filing has priority claims on the assets of the company. During the bankruptcy the company negotiates with existing creditors to lower the debt service cost temporarily or permanently. If there is impairment to existing claims the equity ownership is essentially wiped out and new management is typically brought in by the creditors. Creditors may convert all or part of their claims into equity holdings in the new entity exiting bankruptcy. All of these are designed to orderly resolve claims and give the company a new chance, except the process can be drawn out if the parties involved have different ideas on how best to proceed. The best cases are when the creditors can agree with the management on a plan of resolution pre-filing and the bankruptcy court is used to bring certainty to the plan, in which case the process is often quite short. LBO debt structure is often designed to ease restructuring (with subordination) and holders are likely more concentrated and familiar with the bankruptcy process. If only bondholders are impaired this could be over relatively quickly and the pension claims will not be harmed (at least on paper). The problem is that the bondholders could be too rosy about the business prospect and not willing to impair their own claims enough for the company to be truly financially sound and in a few years the company may be back to the same process a second time.

This is classic Wall Street private equity behavior. Use borrowed money to buy the company, loot the place, and flip it. It's pure parasitic behavior but not illegal.

I would advise anyone working at a company acquired by private equity to bail out ASAP. It is just a matter of time before you get screwed. Especially don't get left with a bunch of company stock.

I do wonder why creditors keep funding these PE deals and why anyone participates in their share offerings. You're asking to get taken.

What about Dell?

Here is where I am struggling with... did the venture guys actually make money in this case or did they make such a balls of it that they actually lost significant amounts of their own money? Would they have 'Looted' the place by paying out bonus to themselves as employees, could they have done this to such an extent that over time it covered the initial capital they put in to take Avaya over?

It happened here in Australia to a beloved electronics store brand.

https://foragerfunds.com/bristlemouth/dick-smith-is-the-grea...

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