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Rating Action:

Moody's Downgrades Avaya to Caa1

12 Feb 2016

New York, February 12, 2016 -- Moody's Investors Service ("Moody's") downgraded Avaya, Inc.'s corporate family rating to Caa1 from B3. Moody's also downgraded the company's probability of default rating to Caa1-PD from B3-PD, its first lien debt facilities to B2 from B1 and its second lien notes to Caa2 from Caa1. The downgrade was driven by continued declines in performance as well as concerns about the sustainability of the current capital structure including its ability to refinance $600 million of debt maturing in 2017. The ratings outlook is negative.

Ratings Rationale

The Caa1 corporate family rating reflects Avaya's very high leverage (greater than 8x as of December 31, 2015) and concerns about the sustainability of the capital structure. The rating also reflects the company's very high debt service and other requirements at a time when the enterprise telephony market is evolving. Debt service, pension service and capital requirements of the business leave little cushion to support unforeseen operating challenges or to make material debt repayment or critical acquisitions. The rating acknowledges the company's industry leading position within the enterprise telephony market and related unified communications markets. At the same time the industry is evolving to include integrated communications offerings, with products offered as either on premise or hosted, managed service solutions. Avaya will need to constantly reinvest in new products and platforms to maintain its position against Cisco, its much larger and better capitalized primary competitor as well as smaller cloud based competitors. Although the company continues to make strides in reducing the cost structure of the business, revenues are expected to continue to decline and it will be challenging to materially improve EBITDA levels in the near term.

The current capital structure is particularly problematic given the changes underway in the unified communications market. In addition to changes in the architectures of corporate communications systems, the increasing preference for subscription based pricing models hurts near term revenues, profitability and cash flow. Though the subscription model or managed service contracts can be beneficial in the long run, the near term hit to performance is particularly challenging when debt levels are high and liquidity is limited. Moody's continues to expect Avaya will be a key long term player in the industry and given sufficient time, with the appropriate capital structure, EBITDA levels will stabilize and potentially improve.

While the company could likely limp along if all maturities were pushed out to 2020, the current capital structure is impractical and at worst, prevents some customers from choosing Avaya.

Liquidity is adequate over the next twelve months but unlikely sufficient to address $600 million in maturities due in October 2017. Liquidity is supported by a $335 million domestic and $150 million foreign ABL lines ($196 million available as of December 31, 2015) as well as cash of $344 million. The company is expected to have modest but very limited free cash flow over the next eighteen months.

The negative outlook reflects Moody's expectation for declining revenues and concern that the company may face challenges in refinancing 2017 and 2018 debt maturities .

The ratings could be downgraded if leverage were to exceed 9x or free cash flow were negative on a sustained basis. The ratings could be upgraded if the company can stabilize revenues and EBITDA and address its capital structure, including pushing out maturities and improving leverage levels to under 7x.

The following ratings were affected:

Downgrades:

..Issuer: Avaya, Inc.

.... Probability of Default Rating, Downgraded to Caa1-PD from B3-PD

.....Corporate Family Rating, Downgraded to Caa1 from B3

....Senior Secured 1st Lien Bank Credit Facilities, Downgraded to B2 (LGD2) from B1 (LGD2)

....Senior Secured 1st Lien Regular Bond/Debenture, Downgraded to B2 (LGD2) from B1 (LGD2)

....Senior Secured 2nd lien Regular Bond/Debenture, Downgraded to Caa2 (LGD5) from Caa1 (LGD5)

Outlook Actions:

..Issuer: Avaya, Inc.

....Outlook, Negative

The principal methodology used in these ratings was Diversified Technology Rating Methodology published in December 2015. Please see the Ratings Methodologies page on www.moodys.com for a copy of this methodology.

Avaya is a global leader in enterprise telephony systems with $4.0 billion of revenues for the LTM period ended December 31, 2015.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Matthew B. Jones
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Lenny J. Ajzenman
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's Downgrades Avaya to Caa1
No Related Data.
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