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LPC: Securus LBO debt structure dampens investor demand
June 14, 2017 / 4:01 PM / a month ago

LPC: Securus LBO debt structure dampens investor demand

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NEW YORK, June 14 (Reuters) - Some institutional investors are dismissing the debt package backing Securus Technologies’ US$1.7bn leveraged buyout due to a first-out revolving credit facility, even as thin dealflow and favorable prison policies under the Trump administration position the provider of inmate telecom and ancillary services to turn the page on its choppy history in the leveraged loan market.

Lead underwriter Deutsche Bank is seeking commitments on the debt, which will fund the company’s acquisition by Platinum Equity, by June 15. In addition to the US$150m five-year first-out revolver, the financing consists of an US$870m seven-year first-lien term loan and a US$280m eight-year second-lien term loan. Price talk on the first-lien term loan opened at 375bp-400bp over Libor with a 1% Libor floor and a 99.5 original issue discount. The second-lien term loan is guided at 800bp-825bp over Libor with a 1% Libor floor and a 99 offering price.

The bank has been in discussions around the structure, as several potential first-lien lenders have submitted orders subject to a revised revolver, or higher pricing if the deal remains as proposed. The second-lien was pre-marketed and is oversubscribed, having been placed in part with some of Platinum’s relationship accounts, said a source.

“Securus has a super senior revolver…worse than an ABL,” a source said.

The pushback is partly technical, given the existing lender base comprises a number of Collateralized Loan Obligations (CLO) that have limitations on the amount of junior lien debt they can own.

“Those constraints feed into market capacity,” a source said. “The question is whether there are enough new buyers where it matters.”

Buyout financings are commonly packaged with pari passu revolvers, putting the loans on equal footing with other first-lien debt in terms of claims on collateral. However, deals for certain industries, such as retail, are structured with asset-based loan (ABL) revolvers, which offer a first priority claim on working capital including accounts receivable and inventory.

While institutional investors are generally averse to financings with ABL revolvers because they subordinate their claims on a company’s most valuable assets, their loans still provide for a first-lien on collateral that does not secure the revolver. But first-out facilities have a first priority claim on overall collateral, meaning in cases like Securus, first-lien lenders effectively have a second priority and second-lien lenders are left with a third priority. Whether the banks or the sponsor pushed for the structure, it makes a statement about those parties’ perception of the deal’s credit risk.

The revolver will be drawn by US$20m at the close of the transaction.

The revolver is rated BB/B1 by Standard & Poor’s and Moody’s, respectively. The first- and second-lien tranches are rated B/B2 and CCC+/Caa2. The issuer is rated B/B3.

Regulatory Cloud

Securus is touting pro forma adjusted Ebitda of US$191m for the trailing 12 months ending March 31, which includes US$10m of synergies, for leverage at roughly 4.7 times through the first-lien debt and 6.0 times total, sources said.

The new owner will contribute US$487m in new equity, while management will roll over around US$35m of their existing stakes, accounting for roughly 31% of capitalization, the sources added.

The debt load has catalyzed concerns among some potential investors, especially since the company is still exposed to regulatory uncertainty, which in the past has caused its debt to trade even at distressed levels.

On the regulatory front, Securus has historically been targeted by the Federal Communications Commission for excessive charges. The agency’s most recent attempt at reforming them, by proposing caps on intrastate phone rates, was stayed following changes in FCC leadership under the Trump administration, pending a final ruling expected by the end of 2017.

Other tailwinds have arisen for now, including the unwinding of the Department of Justice’s plan under former President Obama to phase out the federal government’s use of private prisons, and Presidents Trump’s resolve to take a hard line on immigration and low-level crimes, which would likely spur growth of the prison population.

“Secularly, there are some positive trends for the sector. But as with just about any regulatory risk, I generally don’t believe the new administration has completely eliminated any threat here,” a source said.

A Deutsche Bank spokesperson declined to comment. Platinum Equity did not respond to requests for comment. (Reporting by Andrew Berlin; Editing By Leela Parker Deo and Jon Methven)

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