More Trouble for Avanex

Just when things were looking up a bit, Avanex Corp. (Nasdaq: AVNX) gets slapped by its creditors.

Two bondholders -- Kings Road Investments Ltd. and Steelhead Investments Ltd. -- have given Avanex notices of default on notes due in 2008. Together, the companies hold $25 million of the notes. They're demanding their money back plus a premium of $3.75 million, according to Avanex's Oct. 25 filings with the SEC.

Avanex believes it could defend itself against this action, the filing states, but has chosen to enter negotiations with the bondholders.

With $74 million in cash, cash equivalents, and short-term investments as of June 30, Avanex can pay off the bondholders, if the situation comes to that.

"We believe Avanex has sufficient cash to repay these investors, however we believe the company would then likely require additional funding to complete its restructuring," wrote analyst John Harmon of Needham & Co. in a note issued Oct. 26.

The timing couldn't be worse. Avanex had finally gotten a break when it extended a supply agreement with (NYSE: ALA; Paris: CGEP:PA), its primary customer, earlier this month. (See Bookham, Avanex Shore Up.) Alcatel agreed to continue buying from Avanex through October 2007. According to French paper Les Echos, Alcatel also put up €10 million ($12 million) in prepayment.

Beyond that, it's been a rough few months. Avanex's 10-K filing with the SEC noted several perceived problems with internal accounting controls -- the impetus for Kings Road and Steelhead's default claims -- and included an auditor's note questioning Avanex's "ability to continue as a going concern." Avanex also got a warning from Nasdaq about its stock price being below $1. (See Avanex Concerns Continue and Nasdaq Warns Avanex .)

Avanex also faces a potential sale of 12.8 million shares by Corning Inc. (NYSE: GLW). Some analysts believe this could be a long-term plus for the stock, as Corning is expected to divest but has been prevented from doing so; getting the sale over with quickly could lift some overhang from Avanex's share price, so the theory goes. (See Corning May Sell Avanex Stake.) Harmon believes Corning will be free to sell shortly after Avanex's earnings report on Nov. 8.

— Craig Matsumoto, Senior Editor, Light Reading