BofA Takes Rare Loss Money on Private Equity Loan

(Bloomberg) -- A group led by Bank of America Corp. lost money on arranging $405 million in leveraged buyout debt for private equity firm Permira Holdings LLP, according to people familiar with the matter.

Underwriters rarely lose money in the U.S. leveraged loan market, and this year demand has increased while supply fell by almost 20 percent.

Losses were in the "low-single digit millions" on the financing arranged by Bank of America, Societe Generale SA, Natixis SA and Goldman Sachs Group Inc. for the video technology services provider now called Triton, said one of the people, who asked not to be identified because they aren’t authorized to speak publicly.

A loan to acquisition company Triton for Permira’s buyout of Cisco Systems Inc.’s video technology business priced last week on much worse terms for the borrower than what it was initially seeking, after taking months to sell. Representatives for Permira, Bank of America and Societe Generale declined to comment. Representatives at Natixis and Goldman Sachs did not answer requests for comment.

Triton got pushback from investors due its credit profile. Banks officially started marketing a $415 million loan to back the leveraged buyout in late July -- to dismal reception. The loan was relatively lightly-levered compared to other transactions and offered a much higher return than the market average, but investors simply weren’t interested.

Eroding Valuation

The biggest issue for investors was the borrower’s declining valuation. Permira, which sold the video technology business to Cisco for $5 billion in 2012, was now buying it back for less than $700 million, the people said.

Moody’s Investors Service initially rated both the borrower and its new loan B3, typically the lowest rung for a first-lien financing. The ratings company said it expected continued revenue decline and challenges to setting up the company as a standalone entity while reducing the cost structure.

As investors balked, marketing the loan took 80 days. This made it the longest syndication of 2018 and compared to an average of about three weeks to sell a leveraged loan.

Triton wasn’t helped by market conditions. The LBO transaction, announced on May 1, was inked before a surge in loan issuance related to M&A allowed investors to be choosy and demand tougher terms during the summer. That raised the risk of a bigger loss and the threat of the deal being "hung" -- in other words, partly remaining on the banks’ books.

Triton’s bankers, in agreement with Permira, retooled the loan to make it more appealing to investors. The total debt load was reduced by $10 million, and $100 million of the senior first-lien term loan was privately placed as a second-lien term loan.

Priced to Sell

Adding junior subordinated debt made the remaining $305 million first-lien loan sturdier, and Moody’s upgraded it to B2. Total leverage on the deal was 2.9-times debt-to-Ebitda, below the average for M&A-linked loans, and much less than the levels seen on other risky loans in the market.

The banks also dropped the sales price to 93 from an initially proposed 98.5-99. This was the biggest discount in the U.S. leveraged loan market since February 2017. In addition, the margin was hiked to 600 basis points over Libor from 525-550 basis points initially, even as the loan market turned more issuer friendly in September.

Permira agreed to these changes to lessen the pain for the banks, said people familiar with the matter. At an all-in yield of almost 10 percent -- up from an initial range of 7.5-7.9 percent, according to data compiled by Bloomberg -- the first-lien term loan finally got sold.

The loan traded Thursday morning at 94.5-96.5.

©2018 Bloomberg L.P.