McAfee Covenants Analysis:
2029 Secured 2030 Unsecured Notes Core Analysis
In connection with its acquisition by funds affiliated with Advent International Corp., Permira Advisers LLC, Crosspoint Capital Partners LP and Canada Pension Plan Investment Board, McAfee is issuing $1 billion of secured notes due 2029 (the “2029 Secured Notes”) and $2.32 billion of unsecured notes due 2030 (the “2030 Unsecured Notes” and, together with the 2029 Secured Notes, the “Notes”). The company will also enter into a senior secured credit facility that provides for $5.66 billion of term loans and a $1 billion revolver.
McAfee’s capital structure as of Sept. 25, 2021, adjusted for the issuance of the Notes, is illustrated below
The Notes will be guaranteed by Condor BidCo Inc., and each wholly owned domestic restricted subsidiary that guarantees debt under the new credit facilities and the 2029 Secured Notes will be secured on a pari
basis with outstanding debt under the credit facilities by substantially all tangible and intangible assets of the guarantors.
If the acquisition is not consummated by Oct. 31, 2022, the Notes will be subject to a special mandatory redemption at 100%.
A comprehensive report on the 2029 Secured Notes and 2030 Unsecured Notes is available HERE.
We have also reviewed an analysis on the term sheet governing McAfee’s new senior secured term loan and revolving credit facility. To see the term sheet analysis or to talk to one of our legal analysts, click HERE. You can get access to this product if you have a copy of the term sheet.
Flexibility Under the Notes
McAfee’s flexibility to incur additional pari
debt under the 2029 Secured Notes, secured debt under the 2030 Unsecured Notes and structurally senior debt under the Notes, and to transfer assets to unrestricted subsidiaries and pay dividends under the Notes, is illustrated below. The negative covenants under the Notes are nearly identical, although the 2029 Secured Notes include first lien leverage-based debt incurrence tests, while the 2030 Unsecured Notes include secured leverage-based debt incurrence tests. Access to leverage-based restricted payment and investment baskets under the 2029 Secured Notes is based on first lien leverage tests, while under the 2030 Unsecured Notes, access is based on total leverage tests.
Prominent Issues Under the Notes
Prominent issues under the Notes include:
- Maximizing secured debt capacity through reclassification - The Notes include:
- A secured credit facilities debt basket not to exceed (a) the greater of $6.66 billion and the maximum amount of debt permitted under a 5.75x first lien leverage ratio (under the 2029 Secured Notes) and a 5.75x secured leverage ratio (under the 2030 Unsecured Notes, plus (b) 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, a 1.75x fixed charge coverage ratio or either ratio is not worse than the ratio prior to incurrence; and
- A leverage liens basket subject to compliance with a 5.75x first lien leverage ratio (under the 2029 Secured Notes) or a 5.75x secured leverage ratio (under the 2030 Unsecured Notes
Although the $5.66 billion of outstanding term loans under the company’s new credit agreement at issuance is deemed incurred under the credit facilities debt basket at issuance, there is no prohibition on the issuer reclassifying all such debt after the issue date to the extent it can meet the conditions to access other debt and lien baskets; at issuance, the company can access both the ratio debt and leverage liens baskets.
In order to maximize its additional secured debt capacity, the company will be permitted to reclassify the $5.66 billion of outstanding term loans as ratio debt, secured by leverage liens, and incur $231 million of additional leverage-based ratio debt under the 5.75x first lien/secured leverage tests; by reclassifying the outstanding term loans, the issuer will have replenished capacity under the credit facilities debt basket, which will then provide it with at least $7.815 billion of remaining secured debt capacity.
- “Available RP Capacity Amount” provides additional artificial transfer capacity - At issuance, under the Notes, the issuer can make $580 million of investments utilizing capacity under a general-purpose restricted payments basket not to exceed the greater of $580 million and 50% of EBITDA and can make an additional $870 million of investments using the 50% of consolidated net income of EBITDA, less 1.4x fixed-charges-based builder basket’s starter basket not to exceed the greater of $870 million and 75%.
However, if it accesses these same baskets to make investments through the utilization of the “Available RP Capacity Amount” mechanism that provides capacity equal to 200% of capacity under the general-purpose restricted payments basket and the builder basket (and additional annual capacity under an employee equity buybacks basket), it will be permitted to make $1.16 billion of investments using the general-purpose restricted payments basket and $1.74 billion of investments using the builder basket’s starter basket.
- Sponsors’ $5.2 billion equity contribution to fund LBO likely provides instant dividend, investment capacity - Whereas the builder basket builds capacity based on either 50% of consolidated net income or EBITDA, less 1.4x fixed charges from the “Completion Date,” it, along with the “Excluded Contributions” basket and the contribution debt basket would also provide capacity based on cash contributions and proceeds from equity issuances received since the issue date, which would likely include the $5.2 billion equity contribution. In order to avoid this, the cash contribution components of the builder basket, excluded contributions basket and contribution debt basket should provide capacity based on cash contributions received since the Completion Date.
- Funding dividends with asset sale proceeds - Clause (8) of the exceptions to the definition of “Asset Disposition” permits:
“[A]sset sales, the proceeds of which are used to make such Restricted Payments or Permitted Investments.”
This likely allows the issuer to sell assets and use the proceeds to fund permitted restricted payments or permitted investments without any obligation to use the proceeds for debt reduction or reinvestments in the business.
- Unlimited junior lien leverage-based debt under the 2029 Secured Notes - Because, under the 2029 Secured Notes, the first lien leverage ratio includes only debt secured by first priority liens, and because there is no language that requires all debt incurred under the 5.75x first lien leverage test to be deemed to be secured by first priority liens for purposes of calculating the pro forma first lien leverage ratio, and because leverage-based debt can also be incurred as long as the applicable ratio is not worse than the ratio prior to incurrence, the company can technically incur unlimited leverage-based junior lien debt under the 5.75x first lien leverage incurrence test, as none of that debt would increase the company’s first lien leverage and, hence, the company’s pro forma first lien leverage ratio would not be worse than it was prior to incurrence.
- Leverage-based value leakage baskets subject to first lien leverage tests under the 2029 Secured Notes - The 2029 Secured Notes permit McAfee to make unlimited restricted payments and investments if it can meet specified first lien leverage tests; the 2030 Unsecured Notes permit unlimited restricted payments and investments, subject to pro forma total leverage tests.
Almost all debt documents require companies to meet specified total leverage tests in order to access their leverage-based restricted payment and investment baskets so as to take into account all outstanding junior lien and unsecured debt, in addition to all outstanding first lien debt. Here, to the extent the company can access these baskets, it can incur as much junior lien and unsecured debt as is permitted under the 2029 Secured Notes to pay dividends and make investments without impacting its ability to access its leverage-based restricted payments or investments baskets.
- 103% special redemption under the 2029 Secured Notes does not permit annual redemptions - Almost always, when secured notes allow the issuer to redeem up to 10% of the notes at 103% during the make whole period, they allow the issuer to redeem 10% of the notes in each calendar year (or during each 12-month period).
Under the 2029 Secured Notes, the 103% special redemption mechanics do not explicitly permit such redemptions to be done more than once.
Holder Protections, Aggressive Terms Under the Notes
The following table summarizes the presence of certain material holder protections and material aggressive terms included in the Notes: