Cov-lite loans push up tech companies down under

Who has been benefiting from covenant-lite leveraged loans from Australia this year?

S&P Ratings research published on 27 May shows that an increasing number of covenant-lite leveraged loans are being issued in Australia and New Zealand. The trend appears to be particularly marked in certain sections of the market, including leveraged buyouts and dividend recapitalisations.

The credit rating agency found that rated corporate borrowers in the Australian and New Zealand technology sector had contributed to the increase this year.

Covenant-lite leveraged loans in the report refer to term loan Bs issued by companies based in the two countries. According to a paper published last year by law firm King & Wood Mallesons, these loans are typically underwritten or arranged by investment banks or similar institutions in the debt capital markets.

In Q1, private equity sponsors Apax Partners and KKR sought such loans because they can offer higher leverage. They also offer greater flexibility in terms of restricted payments: the issuers of loans can make investments with the money they have borrowed beyond the parameters set out in loan documents to which they had previously been restricted.

One example in the technology space is TradeMe, a New Zealand-based firm that sold its online marketplace to Titan, another New Zealand company owned by Apax IX Fund. It is understood that the acquisition was completed with a secured debt financing facility. Apax Partners declined to comment on the transaction.

According to the S&P report, TradeMe has an initial debt-to-EBITDA ratio of above 9x after adjustments and inclusive of shareholder loans. The agency adjusted numbers to take account of costs such as operating leases and employee pension contributions, as well as surplus cash adjustments.

Another private equity sponsor, KKR, was reported in February to be seeking to borrow around $1.25 billion to fund its acquisition of MYOB Group.

According to a report from law firm Gilbert + Tobin, KKR offered to buy the company for $2.01 billion. MYOB shareholders voted in favour of KKR’s proposed arrangements and the deal completed on 8 May.

The S&P report shows MYOB to have a debt-to-EBITDA ratio above 5x, excluding shareholder loans. KKR did not return a request for comment on MYOB’s leverage levels.

The report states that five technology companies – Australian Technological Innovators, Computershare, MYOB, SAI Global and TradeMe – had average leverage levels of 5.4x as of the end of 2018.

Data compiled by Bloomberg as of 4 April showed that KKR had sought a $486 million loan and A$390 million covenant-lite term loan B with a seven-year tenor for its buyout of MYOB.

The data also showed that Apax Partners had used a $575 million covenant-lite TLB, among other facilities, to fund its buyout of TradeMe.

Sam Playfair, a Melbourne-based analyst at the rating agency, told PDI: “These term loans are senior secured and have longer tenors, typically seven years, which provide the issuer or financial sponsor a level of flexibility.”

The first Australian dollar-denominated term loan Bs were issued in 2015 on the A$900 million financing of Ventia, a joint venture between Australia’s Leighton Holdings (now known as CIMIC) and US sponsor Apollo Global Management. According to Lawyers Weekly reporting, the deal at the time was valued at A$1 billion. This included a seven-year senior secured term loan B split into a $350 million tranche and a A$359 million tranche, together with an A$100 million revolver with a five-year term.

“We are seeing demand for cov-lite loans from the borrower [private equity sponsor] side as well as from investors,” said Yuen-Yee Cho, a Sydney-based lawyer at King & Wood Mallesons. Cho advised on subsequent refinancings of the Ventia deal, as well as other recent Australian dollar-denominated term loan Bs such as those for SAI Global, GenesisCare, Camp Australia and Australian Technology Innovators. 

Cho added: “What I see is convergence of the flexibility found in high-yield bond terms and term loan B terms – as well as private debt investors who invest for yield and are willing to trade the debt, in contrast to a more traditional bank lending model of lending and holding to maturity.”

She said the usual focus points for term loan B lenders include flexibility of the accordion or incremental debt regime, call protection, restricted payments and the EBITDA definition, including adjustments.

Data compiled by S&P as of 27 May disclosed that the five technology companies had recorded profitability ratios ranging from 33 percent to 46 percent in EBITDA margin terms. The data also showed average annual capital expenditures of between A$33 million and A$46 million from the fiscal years of 2014 until 2018.

Richard Hayes, a Sydney-based lawyer at Hogan Lovells, told Private Debt Investor that the recent issuances of covenant-lite or covenant-loose term debt showed what global and regional private equity sponsors were looking for in the Australian market.

“The question now is how large could such an Australian dollar term loan B or unitranche facility be – it being likely that some of the transactions currently in the market are going to test those limits,” he noted.