Conexant Systems files bankruptcy to implement restructuring agreement

By Caroline Salls

Pittsburgh, Feb. 28 - Conexant Systems Inc. filed Chapter 11 bankruptcy on Thursday in the U.S. Bankruptcy Court for the District of Delaware to implement a restructuring agreement with its equity sponsors and sole secured lender QP SFM Capital Holdings Ltd., an entity managed by Soros Fund Management LLC, according to a company news release.

As part of the restructuring, the secured lender will exchange roughly $195 million of secured debt into equity in the reorganized company and will receive $76 million of unsecured notes issued by a holding company, which can elect to either pay interest in cash or accrue interest in kind.

The company said the new unsecured notes will be non-recourse to the reorganized Conexant operating company.

Creditor treatment

Treatment of creditors under the proposed plan of reorganization will include the following:

• Holders of priority non-tax claims will be paid in full in cash if the claims do not exceed a cap, or a share of $1 million if they do exceed the cap;

• Holders of other secured claims will be paid in full in cash if the claims do not exceed a cap, or a share of $1 million if they do exceed the cap or they will receive the collateral securing the claim or other treatment that leaves the claims unimpaired;

• Holders of secured note claims will receive 100% of the new notes and a share of a secured claims recovery pool in connection with the total amount of all debtor-in-possession facility claims and the secured notes claim.

The secured notes claim will not include the secured notes deficiency claim, which will be treated as a general unsecured claim;

• Holders of general unsecured claims will receive a share of a general unsecured claims recovery pool. If the general unsecured claims class votes to accept the plan, the secured lender will be deemed to have waived its secured notes deficiency claim and its right to participate in the general unsecured recovery pool;

• To preserve the debtors' corporate structure, intercompany claims and intercompany interests will be paid, adjusted, reinstated in full or in part or cancelled or discharged in full or in part to the extent determined appropriate by the reorganized company with the consent of the secured lender; and

• Holders of interests in Conexant will receive no distribution.

Restructuring results

Upon implementation, Conexant said the restructuring will eliminate debt at the operating company, reduce annual cash interest payment by $19.7 million and cut excess real estate expenses by about $7 million annually.

The company said it expects the restructuring to create a stronger capital structure, significantly reduce its break-even revenue level and enable it to generate significant positive cash flow. The restructured Conexant will be well-positioned for long-term growth and improved profitability, according to the release.

Conexant said it plans to receive court approval for its pre-arranged plan of reorganization in less than 85 days, and operations are expected to continue in the ordinary course throughout the financial restructuring process.

None of Conexant's foreign operating subsidiaries are expected to be directly impacted by the filing.

"Following a comprehensive strategic and financial review of the business, we are pleased to have reached an agreement that will allow Conexant to expeditiously complete our financial restructuring initiatives and ensure that we are able to continue serving our customers for many years to come," president and chief executive officer Sailesh Chittipeddi said in the release.

"Our pre-arranged financial restructuring provides for a clear path to renewed growth and success, and upon emergence, Conexant will be a leaner company with a stronger balance sheet that allows for a more focused and consistent investment in product lines.

DIP financing

In connection with the bankruptcy filing, the secured lender has agreed to provide $15 million in debtor-in-possession financing, which will convert into equity in the reorganized company.

Interest will be Libor plus 700 basis points.

The facility will mature on the earliest of 120 days from closing, the plan effective date and the closing of a sale of substantially all company assets.

The company is seeking interim access to $5 million of the DIP financing.

Debt details

According to court documents, Conexant has $100 million to $500 million in both assets and debt.

The company's largest unsecured creditors are Eastman Kodak, with a $2.83 million claim; Silterra Malaysia Sdn. Bhd., with a $1.98 million claim; and ELPF Scranton Road LP, with a $1.23 million claim.

Kirkland & Ellis LLP and Klehr Harrison Harvey Branzburg LLP are serving as legal counsel, and Alvarez & Marsal is acting as restructuring adviser to Conexant.

Conexant is a fabless semiconductor company based in Newport Beach, Calif. The Chapter 11 case number is 13-10367.

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