Case Study: Competitive Refinancing - Magma Capital Advisory

Client

Australia’s second largest records management services provider owned by private equity

The Project

The Client was seeking to refinance their senior and vendor (subordinated) debt and provide additional headroom for organic growth but also to fund an acquisition pipeline. Being private equity owned the Client was being shoehorned into a traditional leverage loan financing ie high margins with unduly restrictive conditions by two Australian banks.

Magma Capital was engaged to provide independent, expert advice of what the client could reasonably expect to achieve and to drive the successful refinancing.

The Objectives

The main objectives of the refinancing were:

1.   Flexibility: removal of stringent leverage loan structures in favour of more corporate style terms and conditions (ability to pay dividends and/ or make capital returns) with soft amortisation (i.e. driven by covenant step down) rather than hard amortisation.

2.   Competitiveness: achieve competitive terms, conditions and pricing;

3.   Headroom: secure committed funding for acquisition opportunities;

4.   Refinancing Risk: reduce refinancing risk by staggering debt maturities.

The Solution

Using the client’s five year business plan, Magma Capital developed a three way financial model drilling down to the exact funding requirements of the business both now and in the future. From this, it was evident the operational leverage of the business was substantially lower than previously thought allowing a far more accommodative financial covenant package to be crafted.

Magma Capital prepared a comprehensive marketing package providing in-depth analysis of the business to provide potential financiers with the comfort that the deal should be run from their corporate loan area rather than their leverage loan teams.

To create competitive tension eight potential financiers were soft sounded with the two most competitive short-listed to submit full credit approved term sheets. The successful financier delivered a financing solution that met or exceeded all of the client’s objectives.

This approach allowed the company to achieve their stated objectives in the following manner:

Flexibility	Yes	Dividend distribution permitted up to 50% NPAT No cash sweep No hard amortisation No financial covenant step down EBITDA definition tailored to accommodate acquisitions and organic growth

Competitiveness	Yes	Upfront fees reduced from 225 to ~90bps Margin achieved was 35bp below the original proposed margin

Headroom	Yes	The facility included a separate tranche to provide funding for acquisitions and/or capital return

Refinancing Risk	Yes	The facility was split into 3 and 5 year tranches

Australian subsidiary of a major Asia based company active in upstream and midstream conventional and renewable power generation.