Leveraged Loan Investors Score Activist Manager-Style Coup

(Bloomberg) -- A group of investors that lent to a data-backup company scored an unusual coup just before Christmas: a seat on its board.

That stands out in a roaring credit market where lenders have resigned themselves to low returns and vanishing protections against companies’ stumbles. 

When it came to Sungard Availability Services, investors seized on a fumbled loan refinancing earlier in 2017 to gain the concession. They also got one of the highest interest rates seen last year.

Getting the board seat was a move straight from the activist equity investor playbook. It could come in handy as money managers prepare to confront the prospect of rising interest rates for companies propped up by years of open credit markets. That’s especially true for firms with the highest debt loads that are more vulnerable to a souring business environment.

“They didn’t have a lot of options, which is why they had to agree to terms like that,” Stephen Sohn, a Moody’s analyst, said of Sungard AS. “It reflects the challenges the company has in demonstrating that they can show sustainable growth.” 

Moody’s Investors Service rates the company six levels below investment grade, while S&P Global Ratings has it one level lower at CCC+, a level that indicates vulnerability to missing debt payments.

The company’s bondholders had asked for a say in the way the business is run, and they were a part of the lender group that agreed to participate in the $425 million refinancing, according to Sungard AS Chief Executive Officer Andrew Stern. The bondholders get to choose the nominee for the board, he said.

"They asked if they could have a board seat and we were agreeable. It’s really as simple as that," Stern said. "The deal is good for the company."

Sungard AS’s latest problems can be traced back to its attempt in June to refinance about $900 million of loans maturing in 2019. Banks led by JPMorgan Chase & Co. could only find lenders willing to refinance a little more than half of that figure.

Finding Alternatives

In the ensuing months, KKR & Co.’s capital markets team agreed to find lenders to refinance the remaining $425 million. KKR’s private equity arm also owns a piece of Sungard AS. Other owners include Blackstone Group LP, Silver Lake, and TPG. (Peter Grauer, chairman of Bloomberg LP, is a non-executive director at Blackstone.)

“When we did not succeed in getting the entirety of the outstanding loan extended and refinanced in the beginning of the summer, we decided we needed more than a conventional banker,” Stern said. “They certainly had a leg up because they’re owned by one of our sponsors but we went out and interviewed several alternatives.”

Representatives for JPMorgan and KKR declined to comment.

KKR’s willingness to look at deals like Sungard AS has helped it become a more active underwriter of loans to U.S. junk-rated borrowers, climbing 22 spots higher in syndicated leveraged loan rankings, according to data compiled by Bloomberg. Loan refinancings were the biggest source of new deals in the leveraged loan market last year as companies looked to push out debt maturities and lower their borrowing costs.

The investment firm’s capital-markets arm arranged the refinancing in late December at 95 cents on the dollar and the new loan will pay 10 percentage points above a benchmark, according to people with knowledge of the matter.

Before the loan deal can be finalized, Sungard AS’s private equity owners have to vote to expand the four-person board, Stern said.

“This is unusual,” Stern said, adding that the company is working on the mechanics of expanding the board now.

Seldom Seen

Board-seat wranglings are more commonplace in the direct-lending market, but they are seldom seen in the broadly syndicated loan market. The company’s bondholders may have pushed for a board seat -- and the greater oversight it offers -- in part because the securities they hold now trade at around 62 cents on the dollar, and have languished below face value since the more than $400 million of notes were sold.

Sungard AS was split from SunGard Data Systems in 2014 and remained in the hands of a group of private equity owners, even as its parent was sold off to Fidelity National Information Services Inc.

Sungard AS has been struggling with its transition to cloud-based recovery services, a transition that is taking time, S&P Global Ratings said in a Dec. 14 report. In its report, S&P noted the additional annual interest of a refinancing would add pressure to already negative free operating cash flow. Sungard’s Stern said the company can cover the payments.

“We do feel confident that we can cover the cost of the debt,” Stern said. “The deal gives us the runway we need.”

To contact the reporters on this story: Sridhar Natarajan in New York at snatarajan15@bloomberg.net, Sally Bakewell in New York at sbakewell1@bloomberg.net.

To contact the editors responsible for this story: Nikolaj Gammeltoft at ngammeltoft@bloomberg.net, Dan Wilchins

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