Monday, November 23, 2015

Another One Bites The Dust: The Perils of Debt Syndication

I previously highlighted the perils of leveraged debt syndications. Another recent failed transaction is Veritas-the seventh broken Euro high yield deal this year. Veritas is a large complex cross border transaction. At $8B it is the largest LBO in 2015. Carlyle and GIC (Singapore’s sovereign wealth fund) agreed to purchase Veitas, Symantec’s data storage unit, in August. The deal takes place in a year in which private equity has faced high purchase prices due to competition from strategic acquirers. Thus, Carlyle likely paid a full price for Veritas.

Some details of the deal are as follows:

1)     Debt Underwriters: Bank of America, Morgan Stanley, Goldman Sachs, UBS, Jefferies, Barclays, Citi, and Credit Suisse.
2)     Original Financing Package: $2.45B term loan, Euro 760MM term loan, $500MM secured notes, and $1.775B unsecured notes. Both term loans were covenant-lite.
3)     Revised Financing Proposal (because the original failed): $1.5B term loan, Euro 760MM term loan, $700MM secured notes, and$700MM retained by the underwriters-never a good sign of the deal’s strength. Both term loans are covenant-lite.
4)     Leverage: giving full credit to pro forma EBITDA improvements yields leverage of 4.5X for the senior and 6.5X total debt. The trailing unadjusted EBITDA leverage is higher. Even at 6.5X pro forma, the level will raise regulatory concerns as it exceeds their 6X threshold. The issuer is rated B/B2.

Investor concerns include:

1)     Size: largest deal of the year.
2)     Business Risk: data storage and cloud uncertainty suggest high business risk.
3)     Leverage: see above.
4)     Difficult to Analyze: divisional buyouts are always hard to evaluate. You are concerned with historical parent cost allocations, and whether the standalone unit can operate as an independent business. Usually underwriters require a forensic accounting review, which is shared with potential investors to give them comfort regarding historical performance. The review reconstructs the historical financial statements. For some reason that was not required here. No wonder investors are reluctant to commit. How can you build reliable reliable debt service models off of unaudited divisional financial statements?

I don’t think the market is losing faith in leveraged debt. Rather this appears to be a poorly structured deal agreed to before the mid August correction by aggressive underwriters trying to win a prestige assignment. Sometimes you have to be careful about what you wish for as may just get it. The underwriters are now getting it.



  1. Nice detailed analysis, have you done the same for the Dell/EMC mna?

  2. I actually did look at Dell/EMC in the 10/19/15 post. I believe it has a good chance of syndicating successfully (depending as always on market conditions) given a) seller financing component (tracking stock) and b)lower leverage at 5.5X EBITDA-below the regulatory flashpoint of 6X. I hope this addresses your question. Thanks for the comment and have a great Thanksgiving! Joe