| NEW YORK, March 10
NEW YORK, March 10 Data center operator Cyxtera
is the first leveraged loan issuer to try to protect itself from
moves by the US government to cut tax deductibility on interest
payments that would make buyout financing more expensive.
The proposed changes will penalize heavily indebted
companies, including many private equity-owned firms, which have
benefitted to date from effectively being able to subsidize debt
A US$1.3bn leveraged loan that backs Cyxtera’s buyout by BC
Partners, Medina Capital Advisors and Longview Asset Management
is the first deal to try to limit increased costs if tax
deductibility ceases. Citigroup is leading the deal.
The financing, which includes an US$815m first-lien loan, a
US$310m second-lien term loan and a US$150m revolving credit
facility, also offers call protection, a standard feature that
helps investors to keep assets by making it more expensive for
companies to repay loans early.
The company is asking lenders to allow it to ‘call’ or repay
its more expensive second-lien loans at a lower price than it
would otherwise have to pay, if the tax changes come into
Cyxtera, the data center business of telecommunications
company CenturyLink, was bought by the private equity consortium
for US$2.8bn in a deal announced last November.
The company’s first-lien loan is being sold with traditional
six months call protection at 101 cents on the dollar and its
second-lien debt has a higher penalty of 102 for the first year
and 101 for the second year.
Cyxtera is, however, asking lenders for permission to buy
back the second-lien loan at the lower price of 101 in the first
year if the US government shuts the tax deductibility loophole
for interest payments.
The prospect of higher debt interest payments is making
companies and private equity firms think twice about lining up
expensive loans – or come up with ways of getting out of steeper
interest payments if tax deductibility disappears, particularly
on large leveraged loans.
“I would not be surprised to see this springing up more
often, especially in the large cap deals and cov-lite deals,
which tend to include more bond-like terms and provide maximum
flexibility for sponsors and borrowers to pursue growth
initiatives and incur additional debt,” said Samantha Koplik,
partner at Dechert LLP.
Covenant-lite loan issuance is expected to break a quarterly
record volume this year after intense repricing and refinancing
activity in the first quarter, according to Thomson Reuters LPC.
The language is expected to crop up more often on
second-lien loans, several lawyers said. Second-lien debt is
also rising with US$4.2bn of volume so far this year, more than
double last year’s first quarter total. Fourth quarter was even
stronger at US$8.6bn.
Higher costs could also prompt companies to use debt more
carefully and focus on rapid repayment and deleveraging during
the life of a term loan instead of constantly refinancing loans.
“It may mark the beginning of a swing back to a model where
companies are really looking to de-lever over the course of a
term loan facility,” Koplik said.
Cyxtera’s request to refinance its second-lien loan in the
first year with a lower prepayment penalty if the tax changes
are passed is anticipating a significant shift in the cost of
debt that could alter the entire capital structure, Koplik said.
Lenders are being asked to agree to provide this repayment
flexibility at closing, which allows borrowers to avoid having
to negotiate later when the outcome and impact of the tax
changes are clear.
Investors are considering Cyxtera’s request before a
commitment deadline of March 14 and are open to similar requests
- as long as they are compensated.
“It’s something that we would consider,” said Joe Mayo,
managing director and head of investment research at asset
Investors that bought the loan in the secondary market above
the level that it could be called could be impacted. This is
more of an issue for bonds than loans, which typically do not
trade higher than 101.
“If you’re going into it with full knowledge, and you’re
buying in the new-issue market, you’re aware of that potential
risk and you’re not going to be facing a significant downside if
it does get called away from you,” Mayo added.
Some investors and leveraged loan lawyers are wondering what
other concessions private equity firms may demand if Cyxtera’s
request is passed as they seek to recoup higher costs and
whether they will be limited to the year of any tax change or
the full maturity of the loan.
“Is there going to be pressure from companies, or private
equity sponsors to push the redemption price down to par?” a
BC Partners declined to comment. Medina, Longview and
Citigroup did not return request for comment.
(Reporting by Jonathan Schwarzberg and Lynn Adler; Editing By