In Shadow of Brexit, Burgeoning European LBO Loan Market Proceeds with Caution

european lbo loan volume

U.K. buyouts accounted for only €2.33 billion of LBO volume across the leveraged loan market in 2016’s first half, versus €14.4 billion of supply for non-U.K. buyouts, according to LCD, an offering of S&P Global Market Intelligence.

Note the €14.4 billion is the largest first-half volume for non-U.K. LBOs since the turn of the decade, indicating that sponsors were either keen to raise financing ahead of the June 23 U.K. Brexit vote, or were simply not perturbed by it.

Sponsors expect LBO activity to continue into the second half of 2016, although the U.K.’s decision to leave the European Union has left market participants in a brave new world of financing, and the biggest obstacle to a pick-up in LBOs will be new valuations. – Nina Flitman

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M&A, LBO Leveraged Loan Issuance Remains in Check During 2nd Quarter

M&A loan volume US

M&A leveraged loan volume declined slightly in 2016’s second quarter, to $56.4 billion from $65.3 billion in the previous three months, according to LCD.

In general, M&A activity has been lackluster, as high equity prices, stiff competition for deals, and regulatory constraints keep a lid on activity.

As for LBOs, private equity shops maintained the unspectacular pace established in the first quarter of the year, logging $18.1 billion in leveraged loan buyout loan volume during the second quarter. – Staff reports

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Dell Software Group Nets Financing for EMC Buyout

Credit Suisse and RBC Capital Markets are providing an undisclosed amount of debt financing to back Francisco Partners and Elliott Management’s purchase of Dell Software Group, sources said.

dellPublished reports put the software unit’s purchase price at north of $2 billion. Dell Software provides advanced analytics, database management, data protection, endpoint systems management, identity and access management, Microsoft platform management, network security, and performance monitoring.

Details of the new financing haven’t emerged, but the software group’s two principal businesses, Quest Software and SonicWALL, are both well known to the leveraged finance markets.

A planned $2 billion buyout of Quest by Insight Venture Partners in 2012 was backed by an $820 million senior secured term loan, a $75 million senior secured revolving credit, and a $300 million senior unsecured bridge, all provided by J.P. Morgan, RBC Capital Markets, and Barclays. The company was later sold to Dell instead, and its purchase of SonicWALL occurred around the same time.

Credit Suisse arranged a $155 million first-lien term loan and a $105 million second-lien term loan to support the $717 million buyout of SonicWALL by an investor group led by Thoma Bravo that includes Teachers’ Private Capital back in 2010.

Dell, meanwhile, is expected to use proceeds from the asset sale to repay debt stemming from its recent acquisition of EMC Group, specifically a portion of its $3.2 billion, three-year term loan A-1, which is held by the deal’s underwriters and other commercial banks. —Chris Donnelly

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Protection One Readies $1.45B of LBO Loans

A Credit Suisse-led arranger group has accelerated the deadline to Thursday, June 18 at noon EDT, from June 23, for the $1.45 billion first- and second-lien financing backing Apollo Management’s purchase of Protection One and ASG Security, according to sources.

The financing is structured as a $1.055 billion, six-year first-lien term loan; a $300 million, seven-year second-lien term loan; and a $95 million revolver. The term loans will be covenant-lite.

Price talk is at L+400, with a 1% LIBOR floor, and a 99 offer price on the first-lien term loan, and L+875, with a 1% floor, and a 98 OID on the second-lien. First-lien lenders are offered six months of 101 soft call protection, while the second-lien would include 102, 101 hard call premiums in years one and two, respectively.

At talk, the first-lien offers a yield to maturity of about 5.3%, while the second-lien would yield about 10.55%.

Credit Suisse, Barclays, Deutsche Bank, Jefferies, RBC Capital Markets, and Goldman Sachs are arranging the transaction.

Apollo last month agreed to purchase both Protection One and ASG Security and merge the two businesses. The purchase prices of the transactions were not disclosed, but the combined company is expected to generate annual revenue in excess of $500 million, according to Protection One. Closing is expected in mid-2015.

Protection One, a business and home security company, is currently owned by GTCR.

Protection One’s existing loans will be refinanced in connection with the transaction. The issuer has in place a $687 million term loan and a $55 million revolver, according to a recent S&P report. The existing term loan due March 2019 (L+325, 1% floor) is governed by a leverage test. – Richard Kellerhals/Kerry Kantin


Veritas Underwriters Ready Loan Backing LBO by Carlyle

An underwriter group led by Bank of America Merrill Lynch has scheduled a lender meeting for 11 a.m. EDT on Monday, June 6, to launch the cross-border financing backing the Carlyle Group’s acquisition of Veritas, sources said.

Recall the covenant-lite loan due January 2023 funded in January as the LBO closed. Though official price talk has yet to circulate the market, underwriters BAML, Morgan Stanley, UBS, Jefferies, Barclays, and Citigroup have been privately showing the cross-border term debt in the 90 area in recent weeks, and with M&A-related new-issue activity slowing, early commitments are said to have surpassed underwriters’ initial $500 million target.

Marketing of the loan follows on the heels of the recent sale of the underwriters’ unsecured debt exposure. Underwriters have now placed all $825 million of the notes, with several underwriters breaking ranks for an initial sale in an 83–84 context. Underwriters later moved the remainder of that paper at 86.5, for a yield of roughly 13.35%, according to sources. Goldman Sachs and Credit Suisse, part of the original underwriter group, were involved the initial sale, sources added.

As noted back in January, Symantec Corp. and the Carlyle Group amended the agreed purchase price for Carlyle’s acquisition of Symantec’s Veritas information management business, to $7.4 billion from $8 billion. At the time, Symantec and Carlyle also agreed to increase the amount of offshore cash remaining in Veritas from $200 million to $400 million, which will result in a net consideration to Symantec of $7 billion. This consideration will consist of $6.6 billion in cash and a $400 million equity interest in Veritas.

A revised loan package eventually funded at the caps; both a $2.109 billion term loan B-1 and €497 million euro TLB, which is priced at L/E+562.5, with a 1% LIBOR/Euribor floor. An additional $400 million, second-out TLB-2 is priced at L+762.5, with a 1% LIBOR floor.

The issuer is rated B/B2, while the senior secured debt drew B+/B1 ratings, with a 2L recovery rating from S&P Global Ratings. Agencies assigned CCC+/Caa1 ratings to the unsecured debt, which drew a 6 recovery rating from S&P Global Ratings.

Underwriters haven’t yet made any move to market the additional $750 million of secured notes that were part of the final deal. While structure is fluid, that financing was expected to be a $441 million U.S. dollar tranche and €262 million of euros, sources said.

As reported, the institutional loan component of the transaction launched to market late last year as a $2.45 billion dollar term loan and a €760 million euro tranche, though was shelved due to market conditions. At the time, a cross-border, dual-currency bond financing was also set to include $500 million of seven-year (non-call three) secured notes and $1.775 billion of eight-year (non-call three) unsecured notes. BAML is left lead on the loans, and Morgan Stanley is left lead on the bonds.

Veritas provides information-management software and services, including multiple cloud deployments, managed services, on-premises infrastructure, and core backup and recovery services. — Chris Donnelly

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How did ACAS become a takeover target? Answer’s in the portfolio mix

How did American Capital become a takeover target? The answer lies in the lender’s equity-heavy, low-yielding investment portfolio mix.

Ares Capital, which trades on the Nasdaq under the ticker ARCC, announced on May 23 it would buy American Capital in a $3.4 billion deal, excluding the company’s mortgage management businesses. American Capital trades on the Nasdaq as ACAS.

One of American Capital’s strategies was its trademarked One Stop Buyout, where it could invest in debt ranging from senior to junior, as well as preferred and common stock, acquiring control of an operating company through a transaction.

However, the accumulation of equity did not allow the company to maintain the steady dividend growth that investors had grown to rely on.

In November 2008, the company stopped paying dividends and began evaluating them quarterly to better manage volatile markets. At the same time, American Capital announced an expansion into European middle market investing through the acquisition of European Capital. Also that year, American Capital opened an office in Hong Kong, its first office in Asia.

The news of the dividend policy change triggered a plunge in American Capital shares. Shares have persistently traded below book value since.

At its peak, the One Stop Buyout strategy accounted for 65% of American Capital’s portfolio. It has since slashed this to under 20% of the portfolio, of which less than half of that amount is equity. It continues to sell off assets.

In a reflection of the change in investment mix, S&P Global Ratings placed Ares Capital BBB issuer, senior unsecured, and senior secured credit ratings on CreditWatch negative, as a result of the cash and stock acquisition plan.

“The CreditWatch placement reflects our expectation that the acquisition may weaken the combined company’s pro forma risk profile, with a higher level of equity and structured finance investments,” said S&P Global analyst Trevor Martin in a May 23 research note.

At the same time, S&P Global Ratings placed the BB rating on American Capital on CreditWatch positive after the news.

“The CreditWatch reflects our expectation that ACAS will be merged into higher-rated ARCC upon the completion of the transaction, which we expect to close in the second half of 2016. Also, we expect ACAS’ outstanding debt to be repaid in conjunction with the transaction,” S&P Global analyst Matthew Carroll said in a research note.

Not the first time
But Ares Capital says it has a plan. In 2010, Ares acquired Allied Capital, a BDC which pre-dated the financial crisis. On a conference call at the time of the deal announcement, management said it plans a similar strategy for integrating American Capital, of repositioning lower yielding and non-yielding investments into higher-yielding, directly sourced assets.

Ares Capital managed to increase the weighted average yield of the Allied investment portfolio by over 130 bps in the 18 months after the purchase, and reduce non-accrual investments from over 9% to 2.3% by the end of 2012, Michael Arougheti said in the May 23 investor call. Arougheti is co-chairman of Ares Capital and co-founder of Ares.

“The Allied book was a little bit more challenged, or a lot more challenged, than the ACAS portfolio is today,” Arougheti said. Ares Capital’s non-accrual investments totaled 1.3% on a cost basis, or 0.6% at fair value, as of March 31.

“Remember, that acquisition was made against a much different market backdrop. And so, while the roadmap is going to be very similar… this can be a lot less complicated that that transaction was for us.”

The failings of American Capital’s strategy reached fever pitch last November, when the lender capitulated to pressure from activist investor Elliott Management just a week after it raised an issue with the spin-off plan.

American Capital’s management had proposed in late 2014 spinning off two new BDCs to shareholders, and said it would focus on the business of asset management. However, in May last year, management revised the plan, saying it would spin off just one BDC.

But Elliott Management stepped in, announcing in November that it acquired an 8.4% stake. It later increased its stake further, becoming the largest shareholder of American Capital. The company argued that even the new plan would only serve to entrench poorly performing management, and called for management to withdraw the spin-off proposal.

American Capital listened. Within days, American Capital unveiled a strategic review, including a sale of part or all of the company.

One reason for the about-face was likely its incorporation status in Delaware, which made the board vulnerable to annual election. Incorporation in Maryland, utilized by other BDCs, is considered more favorable to management, in part because the election of boards is often staggered.

Although American Capital had shrunk its investment portfolio in recent quarters, it had participated in the market until recently.

Among recent deals, American Capital helped arrange in November a $170 million loan backing an acquisition of Kele, Inc. by Snow Phipps Group. Antares Capital was agent. In June 2015, American Capital was sole lender and second-lien agent on a $51 million second-lien loan backing an acquisition of Compusearch Software Systems by ABRY Partners. — Abby Latour

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Qlik Technologies record $1B loan signals direct lending growing up

With today’s record $1 billion loan to fund an acquisition of Qlik Technologies, BDCs are giving notice that direct lending is moving far beyond its middle market roots to challenge traditionally distributed debt financing.

Ares Capital Corp. is leading the $1.075 financing, announced today, which is the largest-ever unitranche credit facility by a BDC. Unitranche combines different tiers of debt, which normally would have different interest rates, into a single loan.

Private equity firm Thoma Bravo is buying Qlik, based in Radnor, Pa., but founded in Sweden, which provides data visualization and analytics software. Shares trade on Nasdaq under the ticker QLIK.

Golub Capital, TPG’s dedicated credit and special situations platform, or TSSP, and Varagon Capital Partners are also joint lead arrangers.

It remains to be seen if this is the advent of a new lending landscape in which unitranche deals of $1 billion or more are commonplace. The acquisition financing for Qlik Technologies stemmed from a period in the loan market when primary issuance was stalled due to financial market volatility that disrupted usual syndication channels.

Leveraged finance market conditions have since improved. Admittedly, the deal’s structure would be a tougher decision by Thoma Bravo in current conditions than those of two months ago, when risk-averse investors shunned complex-story credits or pushed for economic and structural concessions to levels that made buyouts unattractive.

What’s more, this transaction isn’t expected to close until the third quarter, when financial market conditions could be far different than those offered in what is, for now, a buoyant environment for credit. Minimizing risk due to the syndication process is far more attractive to a buyer in most cases.

The transaction is subject to shareholder and regulatory approvals.

A merger deal announced last week stoked expectations that larger loan deals may be ahead from BDCs. Ares Capital, which trades on Nasdaq under the ticker ARCC, announced on May 23 it would buy rival lender American Capital, which trades on Nasdaq as ACAS, for $3.4 billion.

Ares management made no secret of the fact that the company’s purchase of American Capital would allow Ares to originate larger loans, thus generating more underwriting and distribution fees.

In an investor presentation about the purchase of American Capital, Ares pointed out how volatile market conditions had led to enhanced pricing and terms, and increased regulatory burden for banks was opening opportunities for them.

Market volatility—as well as increased regulatory scrutiny of commercial banks that emerged more than two years ago—had already opened the door to club-like transactions by BDCs, which will likely hold the majority of the debt for the Qlik deal.

BDCs are able, and willing, to accept higher leverage levels than banks. In the case of Qlik Technologies, the transaction is expected to result in leverage of more than 6x, sources said.

What’s more, the company generates most revenue outside the U.S., and EBITDA is highly adjusted, creating a structurally complex deal, sources said. Significant cost savings are expected through the buyout.

Such adjustments can present hurdles for banks looking to gain internal approvals to underwrite debt deals, and the prospect of a new alternative financing channel could spur renewed interest in buyout business.

Notably, the $1.075 billion unitranche loan for Qlik Technologies accounts for around one-third of the roughly $3 billion purchase price. Under terms of the acquisition, Qlik shareholders will receive $30.50 in cash per share.

Ares Capital says it is committed to holding a large portion of the financing. At the same time, Ares Capital said it would lead a syndication process to attract more lenders to the credit facility, but only a small part is expected to be syndicated.

“We believe this transaction is representative of the growing acceptance of direct lending as a mature asset class, and we believe our market leading position puts us in the forefront of this paradigm shift,” said Kipp deVeer, Ares Capital CEO, in a statement today.

Ares Capital is no stranger to larger-sized deals.

Last year, Ares Capital closed an $800 million loan for American Seafoods Group, another example of a non-regulated arranger capturing lending business that usually would have gone to a large bank. American Seafoods used proceeds to refinance debt and fund a bond exchange.

The amount of Ares Capital’s exposure to this investment has since shrunk.

As of March 31, the fair value of the American Seafood investment in Ares Capital’s investment portfolio totaled $81.7 million, including first-lien debt, second-lien debt, equity, and warrants. The largest of these was a $55 million, L+900 second-lien loan due 2022, with a fair value of $53 million.

The per-share purchase price for Qlik represents a 40% premium over $21.83, which was the average share price in the 10 days prior to March 3.

On March 3, activist shareholder Elliott Management unveiled an investment in Qlik Technologies, a move that prompted the company to put itself up for sale. Later that month, Qlik hired Morgan Stanley to explore a possible sale of the company, Reuters reported. — Abby Latour

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MultiPlan Sets May 16 Launch for Loan Backing LBO

Arrangers Barclays and Goldman Sachs are holding a lender meeting on Monday morning, May 16, to launch their $3.27 billion, seven-year B term loan backing Hellman & Friedman’s purchase of MultiPlan, sources said.

Financing also includes a $100 million, five-year revolving credit as well as $1.3 billion senior unsecured notes, according to sources.

Hellman & Friedman is acquiring the company from Starr Investment Holdings and Partners Group for $7.5 billion. GIC, Singapore’s sovereign wealth fund, and Leonard Green & Partners will invest alongside Hellman. The issuer generates pro forma EBITDA of roughly $653 million, sources noted earlier.

The issuer’s existing covenant-lite term loan, originally $2.2 billion, dates back to Starr Investment and Partners Group’s 2014 acquisition of the business. The loan cleared the market at L+300, though the spread subsequently stepped down to L+275. Barclays is administrative agent. Also in support of the 2014 buyout, the issuer placed $1 billion of 6.625% notes due 2022. — Staff reports

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Leveraged Loans: Purchase Price Multiples on European LBOs Rise

european LBO purchase price multiple

LBOs in Europe are getting more expensive for private equity sponsors.

The average purchase price, as a multiple of trailing EBITDA, reached 10x in 2016’s first quarter, more than any full-year average, according to S&P Global Market Intelligence LCD.

The multiples paid on these buyouts fall across a wide range. Many of the deals that came to market in the first quarter were bought for an unremarkable multiple, in the 8–9x area, but a good handful of transactions topped 10x — some by a fair margin. – Ruth McGavin

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Russell Investments Readies $700M Leveraged Loan Backing LBO

Barclays, Macquarie, and Credit Suisse have scheduled a lender meeting for Thursday, April 14 to launch a $700 million senior secured financing backing TA Associates and Reverence Capital Partners’ planned acquisition of Russell Investments, according to sources.

The financing comprises a $650 million, seven-year B term loan and a $50 million, five-year revolving credit.

TA Associates and Reverence Capital in October agreed to purchase the asset manager from the London Stock Exchange Group in a transaction valued at $1.15 billion. At the time the deal was announced, the firms said they expected the deal to close in the first half of 2016.

Russell Investments, which is headquartered in Seattle, had over $241 billion in assets under management as of Dec. 31, 2015, according to its website. — Kerry Kantin

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