Mitel Networks disclosed to lenders during a private call on Monday, Nov. 15, that it will prepay $200 million of its $1.123 billion L+450 bps first lien term loan with cash as part of a plan to spend $450 million to reduce debt with proceeds from its strategic partnership
with RingCentral, according to sources. The Canadian IT services company made the announcement during its third-quarter earnings update call, on the heels of RingCentral’s announcement
on Nov. 9 that it would pay up to $650 million to be Mitel’s exclusive UCaaS partner and acquire certain intellectual property rights as well as patents covering network and call management, security and infrastructure.
Mitel’s first lien lenders received a notice today stating that the $200 million prepayment will be made tomorrow, Wednesday, Nov. 17, the sources said.
Mitel’s $1.123 billion L+450 bps first lien term loan due 2025 rose another 4 points this week to 98/98.25 from late last week, after rising 5 points to 94/95 on Nov. 9 from 88/89 the day before, according to Solve Advisors. The $260 million L+875 bps second lien loan due 2026 rose to 89.5/91 today, substantially higher than 74/76 last week.
Mitel has yet to announce the timing for making the remaining $250 million in deleveraging payments but is expected to fund the amount using proceeds from selling RingCentral shares it received in the transaction, the sources said. The company has also not disclosed if all of the proceeds will go toward repaying just the first lien, or how it would reduce its debt loan beyond repaying the first lien tomorrow, but it could use some of the funds to repurchase the second liens at a discount, the sources said.
If proceeds are reinvested within 12 months, including acquisitions of new assets, they would not count as “Net Proceeds” under Mitel’s credit agreement, used to determine any amounts needed to prepay loans from asset sales, sources said previously
. Mitel would then have an additional six months after the 12-month period to define the investments that the proceeds will be used for.
The transaction with RingCentral includes total consideration paid for certain IP rights of $650 million, of which $50 million is held back to cover potential claims and certain events post-closing, according to RingCentral’s 10-Q
. In addition, RingCentral will be Mitel’s exclusive provider of unified-communications-as-a-service, or UCaaS, offerings. RingCentral paid $300 million in the form of cash and about $300 million in the form of 1,281,504 shares of Class A RingCentral stock, par value $0.0001 per share (at a per share value of $234.10, which is equal to the closing price of the Class A common stock on the New York Stock Exchange on Nov. 5). Mitel’s sponsor, Searchlight Capital, will invest $200 million via convertible preferred stock in RingCentral at an initial conversion price of $269.22 per share.
In addition to discussing the RingCentral partnership, Mitel also presented its third-quarter earnings results to lenders Monday. EBITDA for the third quarter of 2021 ended June 30 declined to $28 million from $47 million in the same quarter a year earlier on revenue of $221 million, which was slightly down from the $223 million it generated during the same quarter in 2020, sources said.
Mitel had $29 million of cash as of the end of the quarter and $118 million of total liquidity after repaying all borrowings on the revolver, the sources said, noting total borrowings on the facility were $43 million as of the end of the second quarter. The company spent $15 million on capex during the quarter.
Mitel’s UC division generated $148 million of revenue during the quarter, compared with $149 million in the third quarter of 2020, while the UCaaS division generated $73 million of revenue, flat compared with the same period a year earlier, the sources noted.
Mitel’s financial earnings trajectory underscores the timeliness and strategic value of the partnership with RingCentral, the sources said. The transaction monetizes the value of Mitel’s customer base of 37 million users and eliminates the need for the company to spend more to grow the business, they said.
RingCentral acquired Mitel’s CloudLink, which will enable RingCentral to transition customers to use RingCentral’s messaging and video from the cloud while still utilizing their on-premise technology for voice. Mitel will receive a cash payment for each customer it converts over to RingCentral as it focuses on on-premise customers, they noted. The company also intends to close its R&D centers for its UCaaS business, which will generate cost savings, they added.
Mitel Networks did not respond to an email request for comment.