By Jonathan Schwarzberg and Yun Li
NEW YORK (LPC) - US insurance software provider Vertafore has chosen banks that are not subject to leveraged lending guidance to lead an aggressive US$2.4bn dividend recapitalization, which shows that regulated lenders are still wary of highly leveraged deals.
Vertafore’s deal is the largest dividend recap deal of 2018 so far, according to Thomson Reuters LPC data, and one of the most highly leveraged US loans seen this year, according to ratings agencies.
“It feels aggressive, to say the least,” said a senior trader. “I can’t remember the last time I saw a deal like this. Maybe 2007. It feels that way.”
Vertafore has picked Nomura, Guggenheim and Macquarie to lead the deal, which will pay a US$540m dividend and refinance existing debt, sources said. Credit Suisse (SIX:CSGN) previously led Vertafore’s buyout financing in June 2016 and debt repricing in December 2016.
The new deal consists of a US$1.6bn seven-year first-lien term loan, a US$665m eight-year second-lien term loan and a US$100m revolving credit facility and has price guidance of 325bp-350bp over Libor on the first lien and 700-725bp on the second-lien loan.
The absence of regulated banks this time shows that lenders are still sensitive to leverage levels even after Comptroller of the Currency Joseph Otting de-emphasised the guidance in February.
“I think Vertafore is far enough over the line that most institutions would say that this is a little different and they can’t take that risk,” a senior banker said.
Raising additional debt to finance the dividend payment will boost Vertafore’s leverage to around 10 times, according to Moody’s, and around 11 times according to S&P, which expects leverage to fall to just over 9.0 times in 2019. Moody’s affirmed Vertafore’s B3 corporate rating and S&P rated the company B-.
Soaring investor demand for floating-rate assets in a rising interest rate environment is continuing to produce more highly leveraged deals despite the added repayment risk. Education analytics company Renaissance Learning and retailer Mavis Discount Tires posted leverage of approximately 9.0 times in early May and March, respectively, according to Thomson Reuters LPC data.
Leverage for leveraged buyouts climbed to 6.57 times during the second quarter, according to LPC data, the highest level since the third quarter of 2014, and the fourth quarter of 2007 previously.
TREADING CAREFULLY
US leveraged lending guidance previously identified deals with leverage in excess of more than 6.0 times leverage as meriting greater scrutiny and issuers had to show their ability to repay all of their secured debt or half of their total debt within five to seven years.
The Trump administration is seeking to relax the guidance. Otting said at a conference in February that banks are able to underwrite what they want as long as it does not threaten their “safety and soundness” and reiterated this theme on a conference call Thursday, Reuters reported.
While Otting’s statement appeared to give banks carte blanche to underwrite more aggressive deals, regulated banks are still treading cautiously, although they are gradually increasing the leverage that they are offering.
Bank of America Merrill Lynch (NYSE:BAC) is leading a US$1.33bn loan backing wholesale buildings product distributor SRS Distribution Inc’s buyout by private equity firm Leonard Green & Partners which has leverage of 7.5 times.
“I think people are less fearful that if you make a mistake and underwrite something that doesn’t pass the guidelines that it’s going to have major repercussions as long as it’s exceptional and not normal. I don’t think the guidance has changed or it’s out the door,” a banker said.
HISTORIC LEVERAGE
Vertafore’s private equity sponsors Bain Capital and Vista Equity Partners put leverage of 8.8 times on its books when the firms purchased the company from fellow private equity firm TPG Capital in 2016, according to Moody’s.
Nomura has a history of arranging highly leveraged deals in the insurance software sector, where investors have tolerated higher leverage in return for predictable cash flow. In September 2017, the bank led a US$1.5bn dividend recap for Vertafore’s biggest competitor Applied Systems. Moody’s estimated leverage of around 9.5 times on that deal.
“Leverage this high is certainly not the norm, it’s not usual, but it speaks to the appetite in the credit market today,” said Andrew Chang, an analyst covering Vertafore at S&P.
“Companies that have very predictable revenue, very predictable cash flows and a very strong entrenched market position have the capacity to take on more debt than a regular consumer company, for example,” he added.
Vertafore and Guggenheim did not return request for comment. Nomura, Macquarie and Credit Suisse declined to comment.