New Coverage/Tear Sheet: MoneyGram’s Projected EBITDA Declines Could Significantly Limit Flexibility Under Its Credit Facility Following Recent Amendment

Relevant Items:
Link to Tear Sheet on Reorg Analysis Page
MoneyGram Debt Documents
Credit Agreement Summary
   
On a recent call with investors, MoneyGram said that it would “immediately” begin conversations with lenders with the hope of refinancing its credit agreement governing its revolver and term loan. The company’s recently reduced $45 million revolver matures in September and its $907 million term loan matures in March 2020.

The disclosure came after the money transfer service company revealed that it had reached an agreement with the Department of Justice and the Federal Trade Commission in which MoneyGram would pay $125 million to settle allegations related to the company’s role in preventing fraudulent money transfers, $70 million of which was due in the middle of November. On the same day it announced the settlement, MoneyGram lowered guidance and said it expected a 15% decline in EBITDA for 2018.

As a further potential hit to liquidity, following the new guidance that management confirmed implies about a 25% to 30% fourth-quarter EBITDA decline, MoneyGram amended its revolver and reduced commitments to $45 million from $85.5 million. While the amendment relaxes secured leverage maintenance covenant ratios, it also restricts the company’s ability to draw on its revolver if its cash balance exceeds $140 million; cash in excess of $140 million must be used to repay outstanding revolver borrowings.

The amendment also restricts the company’s ability to incur incremental first lien debt, make restricted payments and investments and make acquisitions if the company’s secured leverage ratio exceeds 3.75x. On Sept. 30, 2018, according to the company, its secured leverage ratio was 3.29x. However, applying the 15% decline in full-year EBITDA implies secured leverage could increase to 3.86x as of Dec. 31.

Although MoneyGram’s ability to incur additional debt or make investments could become substantially restricted as long as the revolver remains outstanding, following its maturity, MoneyGram would no longer be subject to the financial maintenance covenants and would likely be permitted to access additional negative covenant baskets. As of Sept. 30, the agreement allows for $170 million of debt that is pari with the term loan and $100 million of additional secured debt following the revolver’s maturity.

This article provides a brief overview of the negative covenant package under the credit agreement, focusing on the company’s liquidity and ability to comply with the credit agreement’s financial maintenance covenants.
 
On Nov. 8, 2018, MoneyGram announced that it had entered into agreements with the Department of Justice and the Federal Trade Commission related to allegations that the company had not done enough to prevent fraudulent money transfers. Under the terms of the agreements, the company agreed to pay a $125 million penalty and to amend and extend its deferred prosecution agreement with the Department of Justice for 30 months. According to the company, $70 million of the $125 million penalty was required to be paid within 10 days of the agreements, with the remaining $55 million to be paid within 18 months.

In discussing the financial impact of these agreements on the company’s third-quarter earnings call, management stated that:
 
The company’s capital structure as of Sept. 30 is illustrated below for reference:
 
As illustrated above, the company’s undrawn and recently amended $45 million revolver matures in September and its $907 million term loan matures in March 2020. The term loan is indicated at 88, according to sources. The revolver was amended on Feb. 1 to allow for increased secured leverage through the second quarter in exchange for a reduction in commitments to $45 million from $85.5 million.

On the company’s recent earnings call, in light of the agreements with the Department of Justice and the FTC, management discussed its plans for dealing with the upcoming maturities:
 
In early 2017, MoneyGram entered into an agreement with Ant Financial to be acquired for $13.25 per share. That offer was later increased to $18 per share, after the receipt of a competing bid from Euronet Worldwide. MoneyGram and Ant Financial agreed to terminate the merger on Jan. 2, 2018, after the companies failed to receive approval from the Committee on Foreign Investment in the U.S.

This article provides a brief overview of the negative covenant package under the company’s senior secured term loan and revolving credit facility (the “Credit Agreement”), focusing on the company’s liquidity and ability to address the company’s capital structure while the revolver remains outstanding.
 
On Feb. 1, the company announced that it had entered into an amendment to the Credit Agreement. Two notable changes were made to the Credit Agreement that could significantly reduce both MoneyGram’s ability to access its negative covenant basket as well as its ability to access the revolver. These changes will only be effective while the revolver remains outstanding.
  Until the revolver matures, if MoneyGram’s secured leverage exceeds 3.75x:
 

• It may not incur incremental debt (including incremental equivalent debt, other than junior lien or unsecured incremental equivalent debt to repay the term loans), general debt in excess of $10 million or general liens in excess of $5 million;
   
• It may not use the builder basket to make restricted payments or investments;
   
• It may not make more than $2 million of restricted payments from the general basket; and
   
• It may not consummate acquisitions, investments in nonguarantors or make general investments in excess of $5 million.

As mentioned above, although the company has disclosed that as of Sept. 30 its secured leverage ratio was 3.287x, given a projected 15% decrease in EBITDA for 2018, its secured leverage could exceed 3.75x. As such, so long as the revolver remains outstanding, MoneyGram’s ability to incur additional debt or make investments could become substantially restricted.
 
Following the amendment, MoneyGram is not permitted to draw on the revolver if its cash balance exceeds $140 million. In addition, to the extent its cash balance exceeds $140 million, such excess amounts must be used to repay outstanding revolver borrowings (revolving commitments are not required to be permanently reduced). As such, to the extent the company’s cash balance exceeds $140 million, it would likely be unable to draw on its revolver.

While the company reported that it had $209 million in cash as of Sept. 30, because it is required to pay $70 million of the $125 million penalty under its agreements with the Department of Justice and the FTC, the company currently may have less than $140 million in cash. On the third-quarter call, management said that it had “been building our cash balance in anticipation of this settlement” and targeted a minimum level of cash of approximately $120 million needed for “normal” working capital levels.
 
The Credit Agreement includes the following financial maintenance covenants for the benefit of the revolving lenders only as revised with the February amendment:
 

• A 2.25x interest coverage ratio (which only includes cash interest expense);
   
• A 4x secured leverage ratio for Dec. 31, 2018, stepping up to 4.25x on March 31, 2019 and 4.5x on June 30, 2019;
   
• A 5x total leverage ratio; and
   
• An asset coverage ratio that requires MoneyGram to ensure that its cash and equivalents (including restricted cash), plus receivables, plus short-term investments plus available-for-sale-investments are not less than its payment service obligations reflected on its balance sheet.

The leverage ratios do not permit cash to be netted from outstanding debt.

Although, as illustrated in the tear sheet, MoneyGram’s reported adjusted EBITDA is equal to about $257 million, the company has disclosed that:
 
In the company’s 10-Q for the September quarter, it also disclosed that:
 
As illustrated in our calculations below, assuming the company’s reported secured leverage ratio is not calculated net of cash, its reported 3.287x secured leverage ratio implies its Credit Agreement EBITDA is approximately $274 million, $17 million more than its reported adjusted EBITDA.
 
As illustrated below, the company’s current secured leverage ratio likely permits it to incur $189 million of additional secured debt. Once the secured leverage covenant steps up to 4.25x for the March 31 quarter, the company can likely incur an additional $69 million of liens under the general liens basket.
 
However, as illustrated above, assuming the company’s 2018 fiscal year EBITDA is 15% less than its implied EBITDA in 2017, the company’s secured debt capacity would likely be significantly reduced under the secured leverage maintenance covenant.

Similarly, in the company’s 10-K for the 2017 fiscal year, it disclosed that:
 
As illustrated in the Implied EBITDA chart above, the company’s 3.308x secured leverage ratio as of Dec. 31, 2017, implies its Credit Agreement EBITDA was approximately $276 million, which is equal to the $276 million of LTM adjusted EBITDA for the 2017 fiscal year illustrated in the tear sheet.

Assuming the company’s Credit Agreement EBITDA were to decrease by 15%, which the company suggests is “accurate,” as illustrated above, its secured leverage ratio could increase to approximately 3.86x for the 2018 fiscal year. As we discussed above, to the extent the company’s secured leverage were to exceed 3.75x, following a recent amendment to the Credit Agreement, its ability to incur additional debt, make investments and pay dividends would likely be substantially restricted.
 
Although MoneyGram’s ability to incur additional debt or make investments could become substantially restricted as long as the revolver remains outstanding, after the revolver maturity, MoneyGram would no longer be subject to the financial maintenance covenants and would likely be permitted to access additional negative covenant baskets.

Debt and Liens Capacity - The Credit Agreement permits MoneyGram to incur debt and liens under the following baskets:
 

• $370 million of incremental debt, subject to, for incremental debt incurred prior to the revolver’s maturity, compliance with the secured leverage ratio, total leverage ratio and interest coverage ratio financial maintenance covenants and compliance with, in respect to the first $170 million of incremental debt, a 4x first lien leverage ratio and, for all other incremental debt a 3.5x first lien leverage ratio;
   
• Ratio unsecured debt, subject to compliance with a 4.5x total leverage ratio; and
   
• $100 million of general debt and $100 million of general liens.

As illustrated in the Implied EBITDA chart above, using the company’s implied EBITDA of $274 million as of Sept. 30, the company may be able to incur about $170 million of debt under the 4x first lien incremental test and the 4x secured leverage financial covenant; however, the company is close to the 3.5x leverage threshold, and given likely EBITDA declines, it may not have access to the other $200 million of the incremental basket; Once the secured leverage covenant steps-up to 4.25x for the March 31 quarter, the company can likely incur an additional $88 million of liens under the general liens basket.

Restricted Payments Capacity - The Credit Agreement permits MoneyGram to make $50 million of restricted payments, plus additional amounts out of a builder basket based on 50% of consolidated net income (from April 2, 2014), as long as the company can meet a 4.5x total leverage ratio.

Investments Capacity - The Credit Agreement permits MoneyGram to make $50 million of investments, plus additional amounts out of the builder basket, plus $150 million of investments in nonguarantors; the Credit Agreement also permits the company to transfer $35 million of property to nonguarantors in any fiscal year and gives the company significant flexibility to acquire nonguarantors.

Asset Sale Capacity - The Credit Agreement permits MoneyGram to sell up to 10% of its total assets in any 12-month period and also permits the company to dispose of its official check business. Proceeds in excess of $15 million in any fiscal year must be used to repay the term loans, subject to the company’s right of reinvestment.