McAfee’s 2029 Secured 2030 Unsecured Notes Core Analysis
Last week, in connection with its acquisition by affiliates of Advent, Permira, Crosspoint and CPPIB, McAfee began marketing
a $3.32 billion notes offering that consisted of $1 billion of 2029 secured notes and $2.32 billion of 2030 unsecured notes. The company later dropped the secured note offering and reduced the unsecured note offering by $300 million (and correspondingly upsized term loans being incurred under a new senior secured term loan and revolving credit facility).
The negative covenant packages under each series of notes were largely identical and provided
the company with significant flexibility to incur additional first lien and structurally senior debt, pay dividends and transfer assets to unrestricted subsidiaries. In particular, the debt and lien covenants provided the company with the ability to incur at least $13.023 billion of additional first lien debt, equivalent to $1,128% of its $1.155 billion of projected LTM adjusted EBITDA at issuance and to make at least $5.4 billion of investments including transfers to unrestricted subsidiaries, equivalent to 468% of its $1.155 billion projected LTM EBITDA.
Significant contributors to this flexibility company’s secured debt capacity were a group of seemingly innocuous and largely standard negative covenant baskets that, when combined with reclassification and reallocation mechanics, likely created far more flexibility than investors may have realized.
In this article, we briefly describe how reclassification and reallocation mechanics, similar to the ones included in McAfee’s notes, can convert ordinary capacities into extraordinary flexibilities.
Debt, Lien Reclassification Mechanics
McAfee’s notes included the following debt and lien baskets:
- A secured credit facilities debt basket not to exceed (i) the greater of $6.66 billion and the maximum amount permitted under a 5.75x first lien leverage ratio (under the unsecured notes, the test was a 5.75x secured leverage ratio), plus (ii) the greater of $1.155 billion and 100% of EBITDA;
- A ratio debt basket not to exceed the greater of $465 million and 40% of EBITDA, plus additional amounts in compliance with a 7.75x total leverage ratio or a 1.75x fixed charge coverage ratio; and
- A leverage liens basket in compliance with a 5.75x first lien leverage ratio (under the unsecured notes, the test was a 5.75x secured leverage ratio).
Separate debt baskets under both series of notes permitted the issuance of the secured and unsecured notes.
The notes also included standard reclassification mechanics that permitted McAfee to reclassify any debt and liens incurred under one set of baskets into any other set of baskets if it could meet the conditions under those other baskets, but required that:
“[A]ll Indebtedness outstanding on the Completion Date under the Credit Agreement shall be deemed to have been Incurred on the Completion Date under [the credit facilities debt basket] of this covenant.”
Because the $5.66 billion of outstanding term loans under the company’s new senior secured term loan and revolving credit facility on the completion date are deemed incurred under the notes’ credit facilities debt basket, the credit facilities debt basket would have still permitted the company to incur $250 million of additional debt under the first prong of the basket (which represents $6.66 billion minus
$5.66 billion and exceeds the $231 million of debt permitted under the 5.75x first lien/secured leverage component), plus
$1.155 billion under the second prong, for a total of $1.405 billion of remaining secured debt capacity.
Nevertheless, the notes’ reclassification provisions provide the company with significantly more flexibility than meets the eye.
Consider the reclassification mechanics under VistaJet’s
and LifeScan Global’s
“[A]ll Indebtedness outstanding under the Revolving Credit Facility shall be deemed incurred pursuant to [the credit facilities debt basket] … and … may not be reclassified” (emphasis added).
“Indebtedness, Disqualified Stock or preferred stock under … the New Term Credit Agreement outstanding on the Issue Date will be deemed to have been incurred in reliance on the [credit facilities debt basket] … and may not be reclassified” (emphasis added).
Whereas VistaJet’s and LifeScan Global’s notes, like McAfee’s notes, require that the companies’ outstanding debt under their credit agreements on the issue date utilize capacity under the credit facilities debt baskets, they also prohibit the companies from reclassifying that debt after the issue date
Because McAfee’s notes’ reclassification mechanics lack any explicit prohibition on McAfee’s ability to reclassify the $5.66 billion of outstanding term loans after the completion date
, and because McAfee is able to access the ratio debt and leverage liens baskets under the notes on the completion date, the notes almost certainly would not restrict the company from reclassifying all such debt out of the credit facilities debt basket and, in so doing, replenish capacity under the credit facilities debt basket
This will result in McAfee being about to:
As a result, following the completion date, capacity under the credit facilities debt baskets under McAfee’s notes could increase from $1.405 billion to $7.815 billion
- Shift the $5.66 billion of outstanding term loans from the notes’ credit facilities debt and liens baskets to the ratio debt and leverage liens baskets, given that the company is able to access the notes’ ratio debt baskets (requiring compliance with a 7.75x total leverage ratio or a 1.75x fixed charge coverage ratio) and leverage liens baskets (requiring compliance with a 5.75x first lien/secured leverage ratio); and
- Replenish capacity under the credit facilities debt baskets’ $6.66 billion component.
Even if McAfee were unable to access the notes’ ratio debt and leverage liens baskets at issuance, it would still be able to reclassify its outstanding debt anytime after issuance to the extent its leverage profile improves and it can access them.
Reclassification provisions such as the ones in McAfee’s notes are not new. However, as incurrence-based ratio baskets under debt documents are requiring companies to meet looser and looser leverage tests, these standard provisions could become an important tool companies can use to significantly increase their flexibility under their debt documents.
Expansion of Transfer Capacity Through Reallocation
The restricted payment covenants under McAfee’s notes included the following baskets:
- A general-purpose restricted payments basket not to exceed the greater of $580 million and 50% of EBITDA; and
- A builder basket not to exceed the greater of $870 million and 75% of EBITDA, plus additional amounts based on the greater of (i) 50% of consolidated net income and (ii) EBITDA, less 1.4x fixed charges, plus other typical amounts received after issuance.
As is customary in high-yield bonds, because the definition of “Restricted Payments” includes “Restricted Investments,” capacity under the general-purpose restricted payments basket and the builder basket can be used to make at least $1.45 billion of investments.
However, the notes also permit the company to make investments not to exceed the “Available RP Capacity Amount,” which is defined as:
“200% of the amount of Restricted Payments that may be made at the time of determination pursuant to [certain restricted payment baskets, including the general-purpose restricted payments basket and the builder basket]” (emphasis added).
Whereas the company can make $1.45 billion of investments if it directly
uses capacity under the general-purpose restricted payments basket and the builder basket, if it accesses those same baskets through the Available RP Capacity Amount mechanism, all of a sudden, that $1.45 billion of capacity becomes $2.9 billion of capacity.
Although the Available RP Capacity Amount mechanic is not as standard as the debt reclassification mechanic, an increasing number of debt documents, particularly sponsored debt documents, have included it, with more and more of those documents allowing companies to use 200% of their restricted payments capacity for alternative purposes.