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Bankers arranged $15bn in debt financing to fund the leveraged buyout of software maker Citrix. But as they attempted to sell the bonds and loans over the past week, they shocked prospective investors by revealing that the company would need to borrow even more money soon after the deal closed.
On a call last Thursday, executives at Citrix acquirers Vista Equity Partners and Elliott Management explained that soon after their transaction closes, the company would need to draw from a revolving credit line to help fund $200mn in cost-cutting initiatives and the movement of some staff to outside the US, according to four people briefed on the matter.
“They don’t have cash on hand and cash in the business to pay for severance and other wind-down cash expenses,” said one investor on the call. “It was lousy.”
The marketing of Citrix’s debt has become a closely watched gauge of Wall Street’s dealmaking abilities, and it has been difficult. The banks agreed the financing package in January, before the Federal Reserve initiated an aggressive campaign to rein in US inflation by raising interest rates, making it vastly more expensive to fund takeovers with borrowed money.
The banks — led by Bank of America and Credit Suisse — have set a September 19 deadline to offload the debt. So far, investors have been reluctant to take out their cheque books. One creditor called the $16.5bn LBO a “bull-market deal” that made little sense now.
The extra borrowing, to come from a $1bn revolving credit line — a type of facility that is rarely tapped right after a buyout — was seen as a red flag by investors, according to people briefed on the matter.
BofA and Credit Suisse — which are working side-by-side with more than 30 other brokers on Wall Street including Goldman Sachs and Barclays — have been slowly building their order books as they market the debt to investors.
The debt financing includes a $4.55bn term loan and $4bn secured bond, as well as loans the banks plan to hold themselves. Demand has been tepid, with commitments for the loan surpassing $4bn and orders for the bond reaching more than $3bn on Tuesday, according to people with knowledge of the matter. Bankers generally seek to drum up orders that are at least twice as big as the deal size.
To entice some investors, the banks have offered mouth-watering discounts. The secured bond, which was initially expected to yield between 8.5 per cent and 9 per cent, could now be priced with a yield as high as 9.5 per cent, one person added on Wednesday.
Bankers still expect the transaction to be completed, although they face a very different picture to what they imagined when they clinched the deal in January. About $741mn has been earmarked for some of the banker fees and discounts that Citrix’s acquirers would need to offer to finalise the financing package, according to documents circulated this month. But as banks have had to increase the discounts on that debt they are staring down losses of hundreds of millions of dollars.
BofA, Credit Suisse, Vista and Elliott declined to comment.
A sharp market sell-off on Tuesday has only complicated the situation as investors fret that the Fed will need to choke off growth to tame raging inflation. One big lender said that the deal had been going somewhat well until that morning, when the latest consumer price index report was released.
“In August I heard lots of big asset managers [were] putting in big tickets and they were excited to get a big coupon,” the lender said. “After CPI that kind of fell apart. Citrix is . . . a canary for investor demand.”
The precarious mood in markets has already rippled out across Wall Street, with JPMorgan Chase and Citigroup warning that investment banking revenues will be down substantially this quarter. For private equity groups like Vista, which rely on banks’ fundraising machinery to buy up bits of corporate America, rockier credit markets will cap the size of buyouts.
“Companies and investors are going to be more concerned about protecting capital and maintaining liquidity than they are in the camp of chasing risk by funding LBOs,” said Tim Crawmer, a portfolio manager at asset manager Payden & Rygel.
To finance the equity portion of the LBO, Elliott will roll about $125mn in Citrix stock it already owns into the privatisation and raise over $2bn in cash. Vista will merge its Tibco software business into the LBO at a $4bn valuation. The companies will raise $2.5bn through a preferred equity security that carries a whopping interest rate of 12 per cent above Sofr, the floating interest rate benchmark.
On last week’s lender call, bankers at BofA, Citrix’s recently hired chief executive Tom Krause, Steven White of Vista and Isaac Kim of Elliott tried to sell Wall Street on the Citrix-Tibco combination, which they referred to repeatedly as “ComboCo”.
The anodyne ComboCo description underscores its low-profile business, which will be a giant in the management of servers, virtual desktops and the organisation of data and applications on cloud computing networks.
ComboCo’s buyers fielded a barrage of questions on its growth, the competitive pressures coming from Microsoft and Amazon, and how outsourcing engineers, reducing sales and marketing staff and culling products would translate into profits.
In a more hesitant market where dealmakers no longer fear missing out on large deals, some have deemed the deal overly complex and carrying too much financial engineering for the expected pay-off.
“Maybe a lot of starved, yield hungry people will believe in the story and there will be enough of a discount . . . that they [underwriters] build a strong book,” one lender said. “But there’s a lot of hair.”
Private lenders including Apollo Global Management and Ares are backing the deal, investing in the term loans and providing some ballast in a difficult market where the average US junk bond now yields 8.4 per cent. But many investors are deciding to stay on the sidelines.
Robert Cohen, a portfolio manager at asset manager DoubleLine Capital, said the rapid shift in expectations around the Fed was “driving everything” in the market.
“The risk is that inflation is harder to control than the market anticipates,” he said. “We’re worried about deteriorating macro conditions, and that’s traditionally not the time when investors deploy a lot of capital into the single-B [corporate debt rating] risk.”
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