Saddled with slumping revenues and costly long-term obligations, microchip developer Conexant Systems Inc. entered bankruptcy protection in Delaware on Thursday with a hedge fund- and private equity-backed prepackaged Chapter 11 plan that seeks to clean up its balance sheet and reorganize the company within four months.
Backed by senior lender QP SFM Capital Holdings Ltd. — an entity managed by Soros Fund Management LLC — and sponsors Golden Gate Capital and August Capital, the plan would allow Conexant to deleverage debt, streamline operations and shed unproductive leases, according to a declaration by President and CEO Sailesh Chittipeddi.
"Through these restructuring initiatives, as well as a carefully crafted communications plan that will ensure all constituencies are aware of Conexant's objectives and this process, I am confident that Conexant will emerge from Chapter 11 stronger and poised for future growth and success," Chittipeddi said.
QP SFM, which holds all of the company's $175 million secured notes, will provide $15 million in debtor-in-possession financing as part of a restructuring support agreement entered into along with Golden Gate and August.
Although Conexant prefers a reorganization, Chittipeddi said, the RSA sets forth a number of milestones that, if not met, would trigger a Section 363 auction with the senior lender as stalking-horse bidder.
"Regardless of the path — a plan or a sale — the debtors will continue to operate as a going concern," he said.
California-based Conexant designs microchips for a variety of a products, handling R&D and sales while other firms manufacture its products, according to the declaration.
"Conexant's present financial difficulties gradually arose primarily from three sources," Chittipeddi said: declining revenues, mounting debt-servicing costs and the burden of long-term leases taken on during the company's salad days for premises that now sit empty.
Since 2011, Conexant has had to use more than 50 percent of its cash on hand to cover interest on its debt and make payments on these "dead leases," he said.
Under the Chapter 11 plan, filed Thursday along with a disclosure statement and a slew of first-day motions, the senior lender would receive $76 million in new notes and a share of a secured creditors pool.
General unsecured creditors, a group owed approximately $49.2 million, would get a pro rata share of $2 million if they vote to approve the plan. Conexant hopes to complete the voting process by May 9 and hold a confirmation hearing May 16, according to court documents.
U.S. Bankruptcy Judge Mary F. Walrath has been assigned to the case.
Conexant spun off from Rockwell International in 1999 and soon engaged in an 11-month buying spree during which it acquired seven companies for nearly $2 billion in stock, according to the declaration.
The bursting of the dot-com bubble gutted its stock price and forced the company to sell off a number of assets, Chittipeddi said, and while refocusing on DSL technology and a 2004 merger brought some respite, declining prices and demand coupled with maturing debt caused revenue to slump from $970 million in 2006 to $166 million in 2011.
Golden Gate and August purchased its outstanding shares in April 2011 for approximately $200 million, a deal that, thanks to further divestitures and streamlining, had "all the hallmarks of a promising investment," Chittipeddi said.
The unanticipated weakness of the semiconductor industry and the unexpected loss of customers, including now bankrupt Eastman Kodak Co., have caused the company to book $96 million in writedowns since going private, he said, and Conexant missed a September 2011 interest payment.
Headquartered in Newport Beach, Conexant employs more than 225 R&D employees worldwide and holds more than 650 patents for its chips and related technology, and it has more than 200 patents pending.
Conexant is represented by Paul M. Basta, Joshua A. Sussberg and Christopher T. Greco of Kirkland & Ellis LLP and Domenic E. Pacitti, Michael W. Yurkewicz and Morton Branzburg of Klehr Harrison Harvey Branzburg LLP.
The case is In re: Conexant Systems Inc., case number 1:13-bk-10367, in the U.S. Bankruptcy Court for the District of Delaware.
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