New Coverage: Under Amended Credit Agreement, Synaptics Has Significant Capacity to Incur Structurally Senior Debt, May Gain Additional Flexibility From Step-Up of Leverage Maintenance Covenant After DSP Acquisition

Relevant Items:
Synaptics’ Covenant Tear Sheet, Debt Document Summaries
Synaptics’ Debt Documents
Aug. 30, 2021, Investor Presentation

Synaptics is a California-based developer of human interface hardware and software, including touchpads for computer laptops; touch, display driver and fingerprint biometrics technology for smartphones; and touch, video and far-field voice technology for smart home devices and automotives.

On Nov. 24, 2021, Synaptics agreed to sell certain properties in San Jose, Calif., to S B C & D Co., Inc. (dba South Bay Development Co.) in a sale-leaseback transaction for a purchase price of $58 million. The company expects the transaction to close in the third fiscal quarter of 2022 (ending March 2022).

On Dec. 2, 2021, the company acquired DSP Group, a U.S. manufacturer of chipsets for VoIP, multimedia and digital cordless applications, for a cash purchase price of approximately $549 million. The acquisition was funded with the proceeds of a $600 million incremental term loan B incurred under the company’s existing senior credit facilities.

Pursuant to an Aug. 30, 2021, investor presentation, company-projected EBITDA pro forma for the DSP acquisition will be at least $500 million, including $30 million of cost savings.

The company’s capital structure and leverage metrics as of Sept. 25, 2021, pro forma for the DSP acquisition, are shown below:

 

 

• Liquidity and financial covenants - As of Sept. 25, Synaptics had about $597 million of liquidity, comprising $347 million of unrestricted cash and $250 million of availability under its revolver.The credit agreement includes two financial maintenance covenants that are for the benefit of the revolving lenders only but that are tested on a quarterly basis: (i) a 3.75x total net leverage ratio (calculated net of unrestricted cash), which can be increased to 4.25x for the four fiscal quarters following the consummation of an acquisition for not less than $150 million (only two such increases are permitted) and (ii) a 3.5x interest coverage ratio.As of Sept. 25, pro forma for the DSP acquisition, we estimate that the company’s total net leverage ratio and interest coverage ratio were about 1.3x and 16.3x, respectively, and that the financial covenants were therefore satisfied as of that time.Because the DSP acquisition was completed on Dec. 2 for a purchase price of $549 million, the threshold under the leverage maintenance covenant may be increased from 3.75x to 4.25x until December 2022. Although the company can meet the leverage covenant test at either threshold, the maximum amount of debt that the company can incur will vary depending on which leverage test applies. Under the 3.75x total net leverage test, Synaptics can incur a maximum of $1.22 billion of additional debt; under the 4.25x test, maximum debt capacity increases to about $1.47 billion.


• Debt and liens - Synaptics’ ability to incur additional debt and liens is limited primarily by its term loan and revolving credit agreement, which is the most restrictive instrument in the company’s capital structure. Under the credit agreement, the company can incur $1.15 billion of additional pari secured debt under the 3.5x secured gross leverage prong of its incremental debt basket. Because the credit agreement’s general-purpose liens basket prohibits liens on the collateral, Synaptics’ ability to incur additional pari debt is limited to capacity under the incremental debt basket.The credit agreement also permits Synaptics to incur about $1.435 billion of structurally senior debt, comprising $1.22 billion under an unsecured ratio debt basket, $125 million under a general debt basket and $87.5 million under a foreign subsidiary debt basket.Note, however, that, assuming pro forma EBITDA of $500 million, Synaptics will not be able to access the full amount of its structurally senior debt capacity under the 3.75x total net leverage maintenance covenant (which permits maximum debt of $1.22 billion) but would be able to access the full amount if the threshold is increased to 4.25x.


• Dividends and investments - Synaptics’ term loan and revolving credit agreement permits the company to make restricted payments subject to pro forma compliance with a 3.5x total net leverage ratio and to make investments subject to pro forma compliance with a 0.25x turn inside of the credit agreement’s leverage maintenance covenant. The company’s 2029 notes indenture also contains leverage-based restricted payment and investment baskets tested at 4.00x and 4.50x total net leverage, respectively.With a total net leverage ratio of 1.3x as of Sept. 25 (pro forma for the DSP acquisition), Synaptics was able to access each of these leverage-based baskets and is not currently restricted from paying dividends or making investments, including transfers to unrestricted subsidiaries.


• Prepayments, note repurchases - The term loan agreement and 2029 notes indenture only restrict the company from prepaying payment subordinated debt and therefore do not restrict it from prepaying or repurchasing any of the company’s existing debt, including the 2029 senior notes.


• Asset sale sweep - Synaptics’ credit agreement contains an asset sale sweep provision that, commencing from the date that is six months after the Dec. 2, 2021, incremental amendment date (that is, June 2, 2022), requires proceeds from specified asset sales in excess of $62.5 million in any fiscal year to be used to prepay the term loans.The proceeds from the company’s recently announced sale-leaseback transaction of its San Jose properties will not be subject to the sweep if the transaction closes as expected in the third fiscal quarter of 2022 (ending March 2022).

--Julian Bulaon