Direct Lending: March 2020 Term Loan Amendments May Curb Priority Technology’s Ability to Grow Through Continued Acquisitions

Relevant Items:
Priority Technology’s Debt Documents
Priority Technology’s Covenants Tear Sheet, Debt Document Summaries

Priority Technology Holdings Inc. together with its subsidiaries is a provider of merchant acquiring, integrated payment software and commercial payment services. The company was founded on April 23, 2015, and is headquartered in Alpharetta, Ga. Continue reading for our Americas Covenants team's analysis of the Priority Technology term loan amendments 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 has two term loan facilities outstanding under separate credit agreements:

Relying in part on a supportive lender group, Priority Technology Holdings Inc. has been able to grow through acquisitions of whole companies and merchant portfolios. In 2018 and 2019, to finance portfolio acquisitions, lenders under the company’s first lien term loan facility provided an additional $197.5 million in incremental term loans, with Goldman Sachs Specialty Lending, as subordinated term lender, approving the incremental amendments.

On March 18, 2020, the company entered into amendments to its senior term loan and subordinated term loan facilities, which together provided the company with limited covenant relief in exchange for certain lender protections, including increased interest rates, renewed call protection and additional restrictions on transaction capacity. In this update, we highlight some of the key terms of the March 2020 term loan amendments, including how the amended restrictions on investment capacity could interfere with the company’s options for continued growth through acquisitions.

The company’s capital structure as of Sept. 30, 2020, is illustrated below:

 

On March 18, 2020, the company entered into amendments to the credit agreements governing its senior term loan (the “Senior Term Loan Amendment”) and subordinated term loan (the “Subordinated Term Loan Amendment”), which made the following notable changes:

• Pricing / PIK premium: Margin on the senior term loans was increased to 6.5% (from 5%) and the rate on the subordinated term loans was increased to 12.5% (from 10.5%). The term loan amendments also imposed an additional PIK premium of up to 3% payable from the amendment effective date until the date that the company prepaid at least $100 million of the outstanding senior term loan principal. On Sept. 25, 2020, the company prepaid $106.5 million of the outstanding principal under the senior term loans, and thereby terminated the PIK premium requirements under the amended term loans.


• Amortization of senior term loans: The Senior Term Loan Amendment accelerates the amortization schedule under the senior term loans, requiring quarterly principal payments of $4.86 million from March 31, 2021, through Dec. 31, 2021, and increasing to $9.72 million each quarter beginning March 31, 2022. The subordinated term loans do not amortize.


• Renewed call protection: The term loan amendments each provide renewed call protection under the senior term loan and subordinated term loan facility, in each case starting from the amendment effective date. The amended senior term loan provides for 12-month 1% call protection that will expire on March 18, 2021. The amended subordinated term loan provides for 4% call protection until March 18, 2021, when it steps down to 2% until March 18, 2022.


• Restrictions on transfers of material intellectual property: The term loan amendments add new restrictions that prohibit material intellectual property of the company or its restricted subsidiaries from being owned, held by or transferred to any unrestricted subsidiary. Such restrictions are appearing more frequently in direct lending documentation.


• Removal of leverage-based baskets for stock buybacks: Prior to the March 2020 term loan amendments, the senior term loan and subordinated term loan each permitted the company to repurchase its common stock as long as it complied with specified pro forma net leverage tests. The March 2020 term loan amendments, however, eliminated these baskets.


• Leverage-based conditions for accessing transaction baskets: As a result of the term loan amendments, access to all material baskets for restricted payments, investments and prepayments under the senior term loan and subordinated term loan are conditioned on the company’s compliance with first lien or total net leverage ratio tests that the company could not satisfy based on financials as of Sept. 30, 2020. Notably, “Permitted Acquisitions” under each facility now require compliance with leverage tests both before and after giving effect to the proposed transaction, which means that acquisitions are not permitted if the company cannot satisfy the leverage test immediately prior to the transaction regardless of whether the pro forma transaction would reduce leverage.

 

• Liquidity and financial covenants - The senior term loan and subordinated term loan each contain total net leverage covenants, tested at 7.75x and 8.5x, respectively, for the fiscal quarters ended Sept. 30 and Dec. 31, 2020. Based on company-reported total net leverage of 6.16x as of Sept. 30, the company was in compliance with the total net leverage covenants.Total liquidity as of Sept. 30 was approximately $36 million, comprising $14 million of revolver availability and $22 million of balance sheet cash.


• Debt and liens - The senior term loan (which is more restrictive than the subordinated term loan) provides $20 million of general secured debt capacity, consisting of $17 million available for revolving commitment increases and $3 million of general liens. Unsecured debt capacity is capped at $10 million, consisting of $5 million under a general debt basket and $5 million under a subordinated debt basket.


• Dividends and transfers to unrestricted subsidiaries - Due to its current leverage profile, the company has no capacity under the senior term loan or the subordinated term loan to make general restricted payments, investments or prepayments other than to fund interest payments on the subordinated term loans.

--Julian Bulaon