What happened
Shares of Avaya Holdings (AVYA +0.00%) got destroyed in early Friday trading, down 22.2% as of 10:10 a.m. ET, after the heavily indebted communications software maker announced...it's issuing more debt.
Specifically, in an 8-K filing with the SEC, Avaya disclosed that it is selling an additional $150 million worth of "8.00% Exchangeable Senior Secured Notes due 2027." In combination with previous announcements, this means the company will soon have $250 million worth of these debt obligations outstanding.
OTC: AVYA
Key Data Points
So what
Why is this significant? Well, look at what Avaya itself said about the upsized offering.
It is selling new debt paying an 8% interest rate -- but with the principal not due until five years from now -- and it is using the proceeds from this debt offering "to prefund the repayment of, repurchase or otherwise make certain payments in respect of the Company's existing $350.0 million of 2.25% Convertible Senior Notes due 2023," and also "for general corporate purposes." Or put more simply, it's replacing debt that costs it only 2.25% in annual interest -- but the principal of which is due next year -- with new debt that costs nearly four times as much.
Now what
Why would Avaya do this? Not to put too fine a point on it, but Avaya doesn't have $350 million in cash with which to pay off its 2023 notes next year. (According to data from S&P Global Market Intelligence, the company only has about $324 million in the bank). Thus, Avaya has to roll over its debt, push its repayment obligation further down the road -- and pay the going rate on interest to accomplish this.
Unfortunately for Avaya, this may not be the end of things, either, because the company is carrying more than $2.8 billion in long-term debt, and it doesn't currently have the cash to pay that off, either.
Long story short, investors can expect additional debt rollovers in the future and higher interest expense for Avaya, which hasn't earned a profit more than once in the past five years, and may have difficulty paying those debts. Things are not looking good for Avaya right now, and investors would be well advised to take today's sell-off as an object lesson -- and stay alert for other debt-laden companies that may soon experience this very same problem.
