Debt Document Overview
On Oct. 1, 2020, Thryv Holdings went public through a direct listing
on the Nasdaq Capital Market.
The company’s predecessor, Dex Media, declared bankruptcy in 2016, and when it emerged three months later, 100% of its equity was owned by its prepetition lenders, including funds affiliated with Mudrick Capital, Paulson & Co. and Ares Management LLC. The company was renamed Thryv Holdings “to reflect our focus on our SaaS solutions,” and as of Sept. 30, 2020, funds affiliated with Mudrick Capital owned approximately 60% of Thryv’s equity. Continue reading for our Americas Covenants team's analysis of the new Thryv term loan 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.
Thryv operates through two business segments: its legacy marketing segment and its SaaS segment.
On the company’s third-quarter earnings call, John Paulson asked
the company about the possibility of spinning off the higher growth SaaS business:
“When I look at the valuation, as excited it is, we all know software companies trade at much higher multiples than we do. But by combining the two companies together, the whole company only trades at 2.2 times EBITDA. Now, it's hard to find pure plays, but when I look at HubSpot, which is a public SaaS company and not necessarily the same as Thryv but they - the $15 billion market cap they trade at, almost 17 times 2020 sales … 200 times EBITDA. Thryv trades only 0.6 times sales. It would seem that Thryv really - by combining it with a business that's declining low-20% a year, I don't think you'll ever get the valuation that Thryv deserves. So, my question is, why not spin off the Thryv - the SaaS business? Because that can have a valuation that's multiples greater than the total valuation for Thryv today. And the marketing service will probably continue to trade at the same valuation more or less 2 to 2.5 times cash flow.”
“[W]e are running the company today as though we're going to split it tomorrow. We're running the Marketing Services business and the SaaS business as - we're tracking them that way, we're running them that way, and we're thinking about them, accounting for them that way. And we're really working toward an eventual separation because we do see that problem. And it may - you may be correct that it will make sense for us to do that at some point. And I'm going to take very strongly your advice and suggestion and perhaps we should do it sooner than we were thinking” (emphasis added).
On March 1, in connection with the completion of Thryv’s acquisition of a Sensis Holding Ltd., an Australian provider of marketing solutions to small to medium-sized businesses, the company refinanced
its existing term loan facility and amended its asset-based revolving credit facility.
Thryv’s capital structure as of Sept. 30, 2020, adjusted for the new term loan facility, is illustrated below.
In this article, we discuss the company’s ability to spin off its SaaS segment, given restrictions under the new term loan facility, and provide a general overview of its flexibility under the facility.
We find that although the term loan prohibits the company from spinning off the SaaS business, it would allow the company to dispose of it, as long as 100% of the consideration consisted of cash and all proceeds were used to repay outstanding debt under the facility. The term loan also provides the company with limited flexibility to incur additional pari debt, pay dividends or make investments.
Spinning Off, Transferring, Disposing of the SaaS Business
Under debt documents, in order to spin off a business segment to shareholders, a company must have the ability to dispose of the segment and must have sufficient restricted payment capacity to distribute the segment to its shareholders.
Because the asset sale covenants in most debt documents typically permit dispositions that are permitted as dividends or distributions, the analysis of whether a company’s debt documents permit it to spin off assets to its shareholders generally boils down to whether it has sufficient restricted payment capacity.
The asset sale covenant under Thryv’s term loan, however, does not explicitly permit dividends and distributions that are permitted under the restricted payment covenant.
More importantly, however, the term loan prohibits Thryx from making restricted payments of, or transferring to nonguarantors, all or a material portion of the “Software as a Service” business.
As a result, it is unlikely that Thryv’s term loan will allow the company to spin off its SaaS business segment absent an amendment or waiver.
Nevertheless, the term loan does permit the company to dispose of the “Software as a Service” business, as long as the disposition is at fair market value, 100% of the consideration consists of cash and cash equivalents (the 100% cash consideration requirement compares with the 75% cash consideration requirement for all dispositions, other than the “Software as a Service” business) and the proceeds from such sales are used to prepay the term loans.
Although the term loan’s asset sale sweep allows proceeds from non-”Software as a Service” sales to either be used to prepay the term loans (and, if required, other pari
debt) or be reinvested within 12 months (with an additional six months if the proceeds are committed to be used within the initial 12-month period), proceeds from the sale of the “Software as a Service business can only
be used to prepay the term loans.
Taken together, while Thryv’s term loan would currently prohibit the company from spinning off its SaaS segment, it would permit the company to dispose of it, as long as the company received all cash consideration and used the sale proceeds to repay the term loan.
To the extent Thryv wanted to replace the term loan with a facility that provides it with more flexibility with respect to its SaaS segment, prepayments of the term loans are subject to two-year call protection (2% in the first year and 1% in the second) in connection with any voluntary prepayment.
Flexibility Under the Term Loan
Compared with other recent similarly sized sponsored financings, Thryv’s term loan provides the company with extremely limited flexibility to incur additional debt and liens, pay dividends or make investments.
General Limitations on Flexibility
The term loan does not differentiate between restricted and unrestricted subsidiaries, and because the negative covenants apply to Thryv and all of its subsidiaries, the company is unable to transfer any assets to subsidiaries that are not limited by the negative covenant restrictions.
In addition, the negative covenant baskets do not include grower baskets that provide capacity based on the greater of a fixed amount and a percentage of EBITDA or total assets. As a result, the company will not have greater flexibility under the term loan to the extent it is able to grow EBITDA or the value of its assets.
Negative Covenant Capacities
The company can only incur additional pari
debt under an incremental debt basket, subject to meeting a 1.25x first lien leverage ratio and can pay dividends only if it can meet a 1.5x total leverage test (to access a $25 million general-purpose dividend basket) or a 1.25x total leverage test (to access a builder basket based on retained excess cash flow).
On the basis of the company’s preliminary LTM adjusted EBITDA for its 2020 fiscal year of $372 million, it is unable to incur any additional pari
debt or pay dividends.
The term loan also includes the following additional debt and lien baskets:
- A $25 million general debt basket (that can only be accessed by Thryv and the guarantors) that can be paired with a $25 million general liens basket, as long as such liens are not on collateral assets.
- A leverage-based junior lien debt basket, subject to compliance with a 2x total leverage ratio (the basket is currently inaccessible).
- A leverage-based subordinated debt basket subject to the total leverage ratio being less than or equal to 2.5x or not worse than the ratio prior to incurrence; the company can currently incur at least $150 million of subordinated debt under the 2.5x total leverage test.
Although the company is prohibited from transferring any material portion of the SaaS segment to a nonguarantor, the term loan does permit it to make:
- $25 million of general investments.
- An additional $25 million of investments in nonguarantor subsidiaries.
- Investments out of the retained excess cash flow-based builder basket (which also includes a $25 million starter basket) without having to meet a leverage or interest coverage test.
Financial Maintenance Covenant
Whereas in most term loan-ABL facility structures, the term loan does not include a financial maintenance covenant, Thryv’s term loan includes a 3x total leverage ratio maintenance covenant commencing with the June 2021 quarter.
Leverage ratios under the term loan are calculated net of the lesser of all unrestricted cash and $20 million, and the definition of EBITDA permits up to 15% of cost savings with an 18-month look-forward period.
On the basis of the company’s preliminary LTM adjusted EBITDA for its 2020 fiscal year, the company can incur $334 million of total additional debt and remain in compliance with the 3x test. Assuming constant outstanding debt and cash, the company must ensure LTM adjusted EBITDA of at least $261 million.
Amendments, Term Loan Buybacks
Under the term loan, amendments to the pro rata sharing provisions and amendments that result in lenders’ liens being subordinated require the consent of all lenders.
Thryv is permitted to purchase the term loans pursuant to Dutch auctions and in the open market. Mudrick and its affiliates can purchase up to 25% of the outstanding term loans.