x
Optical/IP

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

Stevery 12/5/2012 | 2:55:51 AM
re: More Trouble for Avanex It happens all the time.

??? really? I wouldn't have guessed... unless you mean "it happens all the time to companies nearing bankruptcy."

Press release = public disclosure, most likely with an 8K.
optigong 12/5/2012 | 2:55:51 AM
re: More Trouble for Avanex It happens all the time. Why did Avanex send out a press release ?
Pete Baldwin 12/5/2012 | 2:55:50 AM
re: More Trouble for Avanex Avanex didn't do a press release; they just had the 8-K filing, so I wrote this up to get the info onto the site.

The "default" is kind of a ticky-tack foul, and I'm not sure I would take it as a sign of real trouble. Sure is a nuisance for Avanex, though, at this stage.
Stevery 12/5/2012 | 2:55:49 AM
re: More Trouble for Avanex "The "default" is kind of a ticky-tack foul ..."

Sorry Craig, you lost me.

The default forces a collection of a bunch of money. If the company pays, they are left without much working capital. If they can't, they file Chpt 11 (or 7). Said differently, they either get to dilute the shareholders, or dissolve outright.

What exactly do you mean by "ticky tack"?
tobeit 12/5/2012 | 2:55:49 AM
re: More Trouble for Avanex Craig:

"The "default" is kind of a ticky-tack foul, and I'm not sure I would take it as a sign of real trouble. Sure is a nuisance for Avanex, though, at this stage."

So, why are you digging it out? Any special interest or no better idea what to write about? Kind of boring, isn't it?
dmw_qqqq 12/5/2012 | 2:55:48 AM
re: More Trouble for Avanex I do think this is news worthy information and it is good that LR posted it.

AVNX is certainly not that eager to announce it, and how many people read the 10-K?

-D

Pete Baldwin 12/5/2012 | 2:55:48 AM
re: More Trouble for Avanex Tobeit:
So, why are you digging it out?

In case it turns into something bigger later (cf. Stevery's note) and because it's something I thought readers would take interest in.

Stevery:
What exactly do you mean by "ticky tack"?

Just that to me, it seems like they're getting Avanex on technicalities; it's not like Avanex stopped making payments, or became insolvent, or skipped town, etc. But I'm not an accountant or a lawyer, so I'd be open to arguments to the contrary.
Stevery 12/5/2012 | 2:55:47 AM
re: More Trouble for Avanex Craig: Just that to me, it seems like they're getting Avanex on technicalities; it's not like Avanex stopped making payments, or became insolvent, or skipped town, etc. But I'm not an accountant or a lawyer, so I'd be open to arguments to the contrary.

So you caused me to dig up the 8K to read for myself. Here's what I see, in reading between the lines:

The bond holders got really cold feet. Their payment demand is essentially a statement that the bondholders don't believe AVNX is going to last through the payment period of 2008. (Somebody got fired over the due diligence-- "We invested in what??") They looked for something in the 10K that would tip the default tripwire. They settled on accounting controls.

Default clauses typically tack on the full amount of interest-to-be-paid in addition to the obligation, so that the bondholders can get the maximum payment in the event of default. If you notice, the bondholders asked for the full principle plus $3.75M, which amounts to a 15% payment on money that has been loaned only since May. Nice return if you can get it.

Of course, it is just a negotiating position. They'll settle for a smaller amount (they might just be happy to see just their principle back) because the alternative is a court case. AVNX could easily drag a case out until insolvency was achieved, so the bond holders would see quite a bit less than principle.

Conversely, it isn't helpful to AVNX to have bondholders shouting "you're in default!", so AVNX will be incentivized to not see this in court.

So is it ticky-tack? If I owned stock, no. It's a pair of heavy bond holders pulling out. I don't know the debt structure of AVNX, but the remaining bondholders should also line up while cash remains. Essentially, it should start a run on liquid assets.

If there aren't many bondholders left, then the stockholders should prepare for a major dilution. After payment of $25M, they'll have ~ $40M left, and they are burning ~$20M a quarter. So it looks like cash would need to arrive in 2-3 quarters.

dmw_qqqq: I do think this is news worthy information and it is good that LR posted it.

I concur. Craig, thanks for calling attention to it.

... how many people read the 10-K

More than those who read the 8-K, which is small.


Photonboat 12/5/2012 | 2:55:47 AM
re: More Trouble for Avanex An unrelated question, but does anybody know where I can find a graph of POTS vs. data traffic, forecast by bytes? RHK and other used to publish a voice vs. data traffic forecast, with the "crossover" happening in around 2001, where data overtakes flat voice traffic. Since the advent of VOIP, I would know mean that voice is really POTS or circuit switched traffic as VOIP would count as data.

Any help here?
HOME
Sign In
SEARCH
CLOSE
MORE
CLOSE