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