Applovin
New Coverage: Aggregate Basket Inconsistencies, Liens Exception for Nonguarantor Assets Highlight Significant Structural Subordination Risk Under AppLovin’s Credit Agreement; After IPO, Company Has Essentially Unfettered Flexibility
Mon 05/17/2021 09:34 AM
Relevant Items:
Credit Agreement Summary
Debt Documents
On April 19, KKR-owned AppLovin completed its IPO, selling 25 million shares at $80/share and receiving $1.75 billion of net proceeds. After the IPO, funds affiliated with KKR own more than 93% of AppLovin’s equity. Continue reading for our Americas Covenants team's analysis into the Applovin IPO and the covenant concepts highlighted by the company's credit agreement and Request a Trial for access to the linked debt documents, tear sheets, and summaries as well as our coverage of thousands of other stressed/distressed debt situations.
The company, which provides software and advanced tools for mobile app developers, is the borrower under a senior secured term loan and revolving credit facility that provided the company with a $1.82 billion term loan maturing on Aug. 15, 2025, and a $600 million revolving credit facility maturing on Feb. 15, 2025. According to Reorg’s CLO database, 105 CLO managers are invested in AppLovin’s term loan.
The company’s capital structure as of Dec. 31, 2020, adjusted for the incurrence of additional term loans and revolving borrowings and further adjusted for its IPO, including a $400 million prepayment of outstanding revolving borrowings, is illustrated below.
In this article we discuss two covenant concepts highlighted by AppLovin’s credit agreement: the consequences of aggregate basket inconsistencies and the potential impact of allowing all structurally senior debt to be secured by the assets of nonguarantor restricted subsidiaries. We also briefly discuss AppLovin’s flexibility under its credit agreement as a result of its IPO.
The credit agreement permits AppLovin’s nonguarantor restricted subsidiaries to incur ratio debt not to exceed the greater of $72 million and 40% of EBITDA “at the time of such incurrence,” subject to meeting a 6.25x total leverage ratio or a 2x fixed charge coverage ratio. The credit agreement also permits the company’s nonguarantor restricted subsidiaries to incur debt utilizing capacity under a general-purpose debt basket basket and a basket permitting debt based on available restricted payments capacity not to exceed, when aggregated with ratio debt, the greater of $72 million and 40% of EBITDA “measured at the time of such incurrence.”
Although, as illustrated above, the limitation on nonguarantor restricted subsidiary debt utilizing capacity under the general-purpose debt basket and the debt basket based on available restricted payment capacity also takes into account ratio debt incurred by nonguarantor restricted subsidiaries, the nonguarantor restricted subsidiary ratio debt limitation, as illustrated below, does not take into account any debt incurred under the general-purpose debt basket or the basket for debt based on available restricted payment capacity.
Because these incurrence limitations are tested at the time of incurrence, nonguarantor restricted subsidiaries can incur debt under these baskets as long as they were permitted to do so at the time of incurrence, regardless of whether such debt would be prohibited to be outstanding sometime in the future.
As a result, assuming nonguarantor restricted subsidiaries have not incurred any ratio debt, they are permitted to incur at least $72 million of debt under the general-purpose debt basket and/or the basket for debt based on available restricted payments capacity.
Once the debt under the general-purpose debt basket and/or the basket for debt based on available restricted payments capacity is incurred, however, nonguarantor restricted subsidiaries arguably can then incur at least an additional $72 million of ratio debt, given that, under the ratio debt basket, $72 million of nonguarantor restricted subsidiary debt is not tied to the amount of outstanding general-purpose debt and debt based on available restricted payment capacity that nonguarantor restricted subsidiaries have already incurred.
AppLovin’s credit agreement permits AppLovin and its restricted subsidiaries to incur contribution debt equal to 200% of cash contributions and proceeds from equity issuances received since Aug. 15, 2018.
Given that the company received about $1.75 billion of net proceeds from its IPO, the contribution debt basket likely currently provides the company and its restricted subsidiaries with about $3.5 billion of additional debt capacity. However, because the liens covenant does not include a liens basket that allows contribution debt to be automatically secured on a pari basis with the liens securing the credit agreement obligations, there is no risk to lenders that their claim on the collateral will be diluted by an additional $3.5 billion of pari contribution debt.
Nevertheless, the credit agreement does include a liens basket that permits:
While it is common for debt documents to permit all debt incurred by nonguarantor restricted subsidiaries to be secured by their assets, in the context of AppLovin having received such significant IPO proceeds, the risk of AppLovin’s nonguarantor restricted subsidiaries incurring a substantial amount of secured structurally senior debt is significant.
Because the credit agreement is drafted like a high-yield bond, this risk is further exacerbated by the fact that AppLovin is permitted to transfer unlimited assets within the restricted group, including to its nonguarantor restricted subsidiaries. Although nonguarantor restricted subsidiaries are subject to the credit agreement’s negative covenants, to the extent collateral assets are transferred to them, the liens on those assets will be automatically released.
Whereas unlimited transfers within the restricted group are customary in high-yield bonds, most credit agreements continue to impose caps on such transfers.
Instead of being added to the contribution debt basket, the $1.75 billion of IPO proceeds can alternatively be added to the available capacity under AppLovin’s 50% of consolidated net income-based builder basket which can be used to pay dividends or make investments, including transfers of assets to unrestricted subsidiaries. The company is not required to meet a leverage or interest coverage test to access the builder basket.
In addition, because $400 million of IPO proceeds were used to fully repay outstanding amounts under the revolver and a little over $1.3 billion of proceeds were added to its balance sheet, AppLovin’s first lien and total net leverage declined to negative 1.1x from 3.14x prior to the IPO.
The company’s negative first lien leverage will allow it to incur $2.3 billion of leverage-based first lien debt under a 4.5x first lien leverage test and to access leverage-based restricted payment and investment baskets (which require compliance with a 4x and 4.5x total leverage test, respectively). As a result of being able to access its leverage-based restricted payment and investment baskets, AppLovin is currently not restricted from paying dividends or transferring assets to unrestricted subsidiaries.
The company’s current flexibility under the credit agreement is illustrated below.
As illustrated below, the credit agreement does not include material IP transfer restrictions, anti-PetSmart guarantee protection or anti-Serta Simmons protections against superpriority uptier exchanges.
The credit agreement does, however, permit asset sale proceeds that are subject to the asset sale sweep to step down on the basis of pro forma first lien leverage, uncapped cost savings to be added back to adjusted EBITDA, debt incurrences based on available restricted payment capacity, earlier maturing debt and market capitalization-based annual dividends.
Credit Agreement Summary
Debt Documents
On April 19, KKR-owned AppLovin completed its IPO, selling 25 million shares at $80/share and receiving $1.75 billion of net proceeds. After the IPO, funds affiliated with KKR own more than 93% of AppLovin’s equity. Continue reading for our Americas Covenants team's analysis into the Applovin IPO and the covenant concepts highlighted by the company's credit agreement and Request a Trial for access to the linked debt documents, tear sheets, and summaries as well as our coverage of thousands of other stressed/distressed debt situations.
The company, which provides software and advanced tools for mobile app developers, is the borrower under a senior secured term loan and revolving credit facility that provided the company with a $1.82 billion term loan maturing on Aug. 15, 2025, and a $600 million revolving credit facility maturing on Feb. 15, 2025. According to Reorg’s CLO database, 105 CLO managers are invested in AppLovin’s term loan.
The company’s capital structure as of Dec. 31, 2020, adjusted for the incurrence of additional term loans and revolving borrowings and further adjusted for its IPO, including a $400 million prepayment of outstanding revolving borrowings, is illustrated below.
In this article we discuss two covenant concepts highlighted by AppLovin’s credit agreement: the consequences of aggregate basket inconsistencies and the potential impact of allowing all structurally senior debt to be secured by the assets of nonguarantor restricted subsidiaries. We also briefly discuss AppLovin’s flexibility under its credit agreement as a result of its IPO.
Aggregate Basket Inconsistencies
The credit agreement permits AppLovin’s nonguarantor restricted subsidiaries to incur ratio debt not to exceed the greater of $72 million and 40% of EBITDA “at the time of such incurrence,” subject to meeting a 6.25x total leverage ratio or a 2x fixed charge coverage ratio. The credit agreement also permits the company’s nonguarantor restricted subsidiaries to incur debt utilizing capacity under a general-purpose debt basket basket and a basket permitting debt based on available restricted payments capacity not to exceed, when aggregated with ratio debt, the greater of $72 million and 40% of EBITDA “measured at the time of such incurrence.”
Although, as illustrated above, the limitation on nonguarantor restricted subsidiary debt utilizing capacity under the general-purpose debt basket and the debt basket based on available restricted payment capacity also takes into account ratio debt incurred by nonguarantor restricted subsidiaries, the nonguarantor restricted subsidiary ratio debt limitation, as illustrated below, does not take into account any debt incurred under the general-purpose debt basket or the basket for debt based on available restricted payment capacity.
Because these incurrence limitations are tested at the time of incurrence, nonguarantor restricted subsidiaries can incur debt under these baskets as long as they were permitted to do so at the time of incurrence, regardless of whether such debt would be prohibited to be outstanding sometime in the future.
As a result, assuming nonguarantor restricted subsidiaries have not incurred any ratio debt, they are permitted to incur at least $72 million of debt under the general-purpose debt basket and/or the basket for debt based on available restricted payments capacity.
Once the debt under the general-purpose debt basket and/or the basket for debt based on available restricted payments capacity is incurred, however, nonguarantor restricted subsidiaries arguably can then incur at least an additional $72 million of ratio debt, given that, under the ratio debt basket, $72 million of nonguarantor restricted subsidiary debt is not tied to the amount of outstanding general-purpose debt and debt based on available restricted payment capacity that nonguarantor restricted subsidiaries have already incurred.
Secured Structurally Senior Debt
AppLovin’s credit agreement permits AppLovin and its restricted subsidiaries to incur contribution debt equal to 200% of cash contributions and proceeds from equity issuances received since Aug. 15, 2018.
Given that the company received about $1.75 billion of net proceeds from its IPO, the contribution debt basket likely currently provides the company and its restricted subsidiaries with about $3.5 billion of additional debt capacity. However, because the liens covenant does not include a liens basket that allows contribution debt to be automatically secured on a pari basis with the liens securing the credit agreement obligations, there is no risk to lenders that their claim on the collateral will be diluted by an additional $3.5 billion of pari contribution debt.
Nevertheless, the credit agreement does include a liens basket that permits:
“Liens on property of any Restricted Subsidiary that is not a Credit Party, which Liens secure Indebtedness of such Restricted Subsidiary or another Restricted Subsidiary that is not a Credit Party, in each case, to the extent permitted under [the debt covenant].”
While it is common for debt documents to permit all debt incurred by nonguarantor restricted subsidiaries to be secured by their assets, in the context of AppLovin having received such significant IPO proceeds, the risk of AppLovin’s nonguarantor restricted subsidiaries incurring a substantial amount of secured structurally senior debt is significant.
Because the credit agreement is drafted like a high-yield bond, this risk is further exacerbated by the fact that AppLovin is permitted to transfer unlimited assets within the restricted group, including to its nonguarantor restricted subsidiaries. Although nonguarantor restricted subsidiaries are subject to the credit agreement’s negative covenants, to the extent collateral assets are transferred to them, the liens on those assets will be automatically released.
Whereas unlimited transfers within the restricted group are customary in high-yield bonds, most credit agreements continue to impose caps on such transfers.
Flexibility Under the Credit Agreement
Instead of being added to the contribution debt basket, the $1.75 billion of IPO proceeds can alternatively be added to the available capacity under AppLovin’s 50% of consolidated net income-based builder basket which can be used to pay dividends or make investments, including transfers of assets to unrestricted subsidiaries. The company is not required to meet a leverage or interest coverage test to access the builder basket.
In addition, because $400 million of IPO proceeds were used to fully repay outstanding amounts under the revolver and a little over $1.3 billion of proceeds were added to its balance sheet, AppLovin’s first lien and total net leverage declined to negative 1.1x from 3.14x prior to the IPO.
The company’s negative first lien leverage will allow it to incur $2.3 billion of leverage-based first lien debt under a 4.5x first lien leverage test and to access leverage-based restricted payment and investment baskets (which require compliance with a 4x and 4.5x total leverage test, respectively). As a result of being able to access its leverage-based restricted payment and investment baskets, AppLovin is currently not restricted from paying dividends or transferring assets to unrestricted subsidiaries.
The company’s current flexibility under the credit agreement is illustrated below.
Lender Protections, Aggressive Terms Under the Credit Agreement
As illustrated below, the credit agreement does not include material IP transfer restrictions, anti-PetSmart guarantee protection or anti-Serta Simmons protections against superpriority uptier exchanges.
The credit agreement does, however, permit asset sale proceeds that are subject to the asset sale sweep to step down on the basis of pro forma first lien leverage, uncapped cost savings to be added back to adjusted EBITDA, debt incurrences based on available restricted payment capacity, earlier maturing debt and market capitalization-based annual dividends.
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