By Dietrich Knauth

NEW YORK, April 4 (Reuters) - Information technology service provider ConvergeOne filed for Chapter 11 bankruptcy protection in Texas on Thursday, saying that it has a deal in place to slash $1.6 billion in debt and turn control of the company over to its lenders.

ConvergeOne blamed rising interest rates, the bankruptcy of a key equipment supplier, and a downgraded credit rating as reasons for its recent financial struggles. The company has $1.8 billion in debt, and it reported $1.525 billion in revenue for 2023.

The company's restructuring is supported by over 80% of its lenders. The company intends to hand over about 96% of its equity to its most senior lenders, who are owed over $1 billion, and about 4% of its equity to the next-ranking group of lenders, who are owed about $275 million. Junior creditors, such as IT equipment suppliers, are expected to be paid in full, according to court documents filed in Houston bankruptcy court.

ConvergeOne is currently owned by private equity firm CVC Capital Partners, which took the company private in a 2019 deal that valued the company at approximately $1.8 billion. CVC’s existing equity shares would be wiped out in the proposed restructuring.

Under CVC’s ownership, ConvergeOne went on a buying spree from 2019 to 2022, purchasing seven companies that provided IT solutions, digital infrastructure and cloud-focused software.

ConvergeOne's high debt level became less sustainable during a recent period of rising interest rates in the U.S., according to court documents. The company's interest payments rose by approximately $55 million on an annual basis from 2022 to 2023, at a time when the company was also facing business disruptions related to the financial distress of IT equipment manufacturer Avaya. Avaya filed for bankruptcy in February 2023 and emerged in May 2023 after slashing its debt by about $2.6 billion.

ConvergeOne relied on Avaya to supply equipment for some of its IT support services. Avaya's financial troubles caused the company to face customer delays and business disruption that "substantially depressed" ConvergeOne's earnings in 2022 and 2023, according to court filings.

ConvergeOne said that market confidence in Avaya-dependent services is on the rise now that Avaya is nearly a year removed from its bankruptcy restructuring.

ConvergeOne has lined up a bankruptcy loan that would allow the company to borrow up to $215 million in new money during its Chapter 11 case.

ConvergeOne is headquartered in Bloomington, Minnesota, and it has 3,000 employees in 15 countries.

The case is In re ConvergeOne Holdings, U.S. Bankruptcy Court for the Southern District of Texas, No. 24-90194.

For ConvergeOne: Charles Koster, Bojan Guzina, Andrew O'Neill of White & Case, among others

Read more:
Avaya files for Chapter 11 bankruptcy

(Reporting by Dietrich Knauth)

((Dietrich.Knauth@thomsonreuters.com;))