Paying dividends
Robust US leveraged loan market conditions in 2017 helped companies to slash borrowing costs in opportunistic deals but lesser-known borrowers and story credits were still subject to scrutiny and held to high standards despite investors’ strong appetite and ability to lend.
The challenge of overcoming periodic displays of market discipline was highlighted by a US$1.85bn loan for internet security company DigiCert, which financed its purchase of Symantec’s website security and public key infrastructure unit in August.
The deal funded a Goliath acquisition that was four times larger than David-sized new issuer DigiCert, assumed a truckload of adjustments with synergies and cost savings totalling 30% of pro forma Ebitda, and had to be restructured late in the day to pay a sponsor dividend.
UBS led a group of banks, including Credit Suisse, Jefferies, Macquarie and Goldman Sachs, which converted investor scrutiny into demand.
The book was more than three times oversubscribed and yielded issuer-friendly terms, highlighting UBS’s ability to skilfully execute on story credits and deliver superior outcomes for its clients.
The deal was a carve-out and the unit did not have audited financials. Moody’s declined to rate it on that basis, which proved a stumbling block for CLO funds, which base their investment decisions on ratings.
DigiCert also lacked a large existing institutional lender base to tap as the company had only a small outstanding credit facility that had been led by Jefferies.
“We had very specific challenges that we had to address,” said Francisco Pinto-Leite, global co-head of leveraged finance at UBS. “We had to go one-by-one, with a lot of hand-holding of accounts.”
Even so, UBS had the deal fully subscribed ahead of the bank meeting on September 7. It launched the transaction as a US$300m three-year Term Loan B1, a US$900m seven-year Term Loan B2 and a US$300m eight-year second-lien term loan.
In a test of its mettle, UBS then had to accommodate a request by Thoma Bravo, DigiCert’s private equity owner, to use the transaction also to finance a US$350m dividend, all of its equity in the company.
The debt package was restructured into an upsized US$1.35bn seven-year first-lien term loan and a US$500m eight-year second-lien term loan.
“UBS did an incredible job of building the books,” said Erwin Mock, managing director, capital markets at Thoma Bravo. “There was so much demand that people starting ignoring the headline issues.”
The first-lien term loan was priced at 475bp over Libor, while the second-lien loan came at 800bp over Libor, tight to initial guidance of 500bp and 850bp, respectively. Both tranches were issued at 99.5, versus 99 at launch.
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