Telex Turns to Plan B,
Proposes Debt for Equity Swap
By Christian Doering, Marketing Partner
Dynamic Market Systems

Regular visitors to Industry Biz know that Telex has been struggling to service its debt, which currently amounts to over $350 million. Earlier this year, Telex borrowed $20 million at credit card rates to make interest payments on its senior notes. More payments are due later this year, and management has been cautiously optimistic in earlier SEC filings that a combination of operational improvements and the sale of “certain business and assets” would generate enough cash to service the massive debt. Two problems there: the economy continues to suck, and the loss-making business lines Telex would like to dump aren’t worth a lot of cash (which is what Telex desperately needs), while the profitable businesses are the ones buyers want.

On to Plan B: a financial restructuring of the company in which the most senior creditors will receive “various combinations of cash and securities to be issued by a newly organized operating company which will acquire substantially all of the assets of Telex.” A press release issued on September 13 implies that Telex now thinks it can persuade its creditors to turn about two thirds of the existing debt into equity. According to Chairman Edgar S. Woolard, this “will reduce substantially the significant debt and debt service obligations we have had for years and will result in a better capitalized Telex. We believe this plan will make us a stronger competitor and strengthen our partnerships with suppliers and customers, and is also in the best interest of our creditors. We want to assure our business partners that our debt restructuring will cause no interruptions in our service or our obligations.” Umm ,except for “the interest payment due on September 17, 2001 under its 11% Senior Subordinated Notes and the November 1, 2001 interest payment that is due on its 10-_% Senior Subordinated Notes,” which Telex plans to skip “in anticipation of completing the debt restructuring.”

The press release, issued by Telex CFO Dick Pearson, explains that “If all of the Telex Senior Subordinated Notes are tendered and accepted for exchange, and if the requisite financing for the debt restructuring is obtained, the aggregate exchange consideration will be comprised of $127 million of cash, Senior Subordinated Notes and Preferred Stock, and all of the Common Stock of the new operating company and Warrants to purchase up to 30% of the Common Stock of the new operating company.” In other words, about $200 million of Telex’ current debt will cease to accrue interest and require cash payments on a set schedule. Instead, Greenwich Street Capital Partners, Bank One, Morgan Stanley, Chase Manhattan and other banks who put up the money in the first place will become equity owners of a new operating company.

This new operating company “will acquire substantially all of the assets of Telex,” according to the press release, but will have much lower debt. The balance sheet will look better, and so will the quarterly and annual proft and loss statements, since the new operating company will no longer be obligated to make massive cash payments in order to service the debt. All well and good, as Mr. Woolard emphasizes, for Telex, its vendors and customers. But what about the bankers? As senior creditors, they were first in line to get paid: as equity shareholders they move to the back of the line. But now, instead of a fixed obligation, they own everything that’s left over after creditors such as suppliers, employees and “working capital” lenders have been paid. In effect, the banks are doing the same kind of thing you as an individual investor might do by transferring your IRA from corporate bonds (“junk bonds,” although no longer hot news, were still fashionable on Wall Street in 1997, when Greenwich Street Capital Partners merged Telex and EV) to stocks.

In order to make this financial magic happen, Telex “is soliciting consents to, among other things, transfer Telex’s assets and liabilities to the new operating company and to amend the terms of the indentures governing the Telex Senior Subordinated Notes to eliminate various restrictive covenants.” In other words, the banks have to approve this deal. Why would they want to move to the back of the check-cashing line? Because if they don’t, they’re exposing themselves to a very high risk of losing all or most of the money they put up to merge Telex and EV. By exchanging their fixed debt obligations for equity shares and warrants whose value can go up or down, the banks actually reduce the risk that these rather large loans will never pay out. The proposal allows Telex to continue operating, and maintains continuity of sales and service operations under the existing brands. In turn, that raises the odds the banks’ equity will be worth more than they have paid for it. Given a couple of strong sales years, some good growth numbers and rosy financial statements, Telex might even go public and transfer the risk from a few banks to a larger pool of institutions and individuals. With luck, an IPO might be the vehicle for the original investors to be rewarded for risking lots and lots of money in AV technology.

Sound like a plan? Let’s hope so. Telex has imposed a deadline of October 12 for the creditors to agree that this is the best way forward.