In Hot Debt Markets, Wall Street Shows It Can Beat Shadow Banks

(Bloomberg) -- After stunning the market last year with an improbable buyout arranged by alternative lenders, tech-buyout specialist Thoma Bravo LLC is stepping out of the shadows and back into the arms of Wall Street to lower its borrowing costs.

The private equity firm has tapped Morgan Stanley and Goldman Sachs to wrest control of the billion-dollar loan so it can slash by more than half the interest on the debt used to purchase Qlik Technologies Inc. Thoma Bravo is playing the borrowing field to get the best of both sides, traditional and so-called shadow banking.

While direct-lending firms have been steadily chipping away at Wall Street business, they face stiffer obstacles in a strong market. The reach of traditional banks can still find yield-hungry investors to pocket any kind of deal at rates that don't work for alternative lenders taking down chunks of the deal. Thoma Bravo is also flaunting stronger earnings at Qlik that have allowed banks in on the deal without worrying about running afoul of regulatory restrictions.

"In a hot market, for a clean story, it makes more sense to go with the syndicated solution provided by banks -- it's a lot more attractive pricing," said Erwin Mock, Thoma Bravo's managing director of capital markets. "When it's a more complex credit, with larger pro forma adjustments and markets are volatile, sometimes direct lending is the way to go."

Representatives for Morgan Stanley, Goldman Sachs Group Inc. and Ares Management, which led the buyout debt, didn't comment on the refinancing.

Protracted Battle

Without the direct lenders, Thoma Bravo wouldn't have been able to clinch the buyout in the first place. The alternative-lending group offered the certainty that was critical to win the deal, which was funded by one of the largest unitranche debt offerings. But there's an incentive for the banks to get control of the loan now.

The fees for refinancing loans are much less than arranging the original buyout debt. Banks still get to benefit from taking over the reins of the loan with other incremental fees down the line.

"Once you are in the credit, and you are the arranger, there's going to be activity," said Jeffrey Ross, a partner at Debevoise & Plimpton, who advises on acquisitions and financings. "Refinancings and repricings, which is an annuity that has value for banks."

‘So Hot'

While the trend of firms circumventing banks to carry out transactions continues, it promises to be a protracted battle with Wall Street unwilling to give up control easily. And with the Trump administration promising to peel back regulations that have deterred banks, that's giving an added dose of optimism for big banks to reassert themselves.

“Even in today's competitive market, unitranche financing continues to be highly valued by private equity sponsors in more complex transactions where speed, flexibility and certainty of execution are critical factors in getting to closing,” said Kipp deVeer, head of the Ares Credit Group.

Thoma Bravo hopes to be able to reduce the interest on the Qlik loan to as low as 4.5 percent, down from the roughly 9.25 percent it paid to obtain the debt last year, according to Mock. If it's able to win that rate from loan investors, the firm will be willing to pay the 5 percent breakup fee associated with the private loan that was provided by Ares Capital Corp., Golub Capital, TSSP and Varagon Capital Partners.

"We are now more than a year past the last time we had a real dislocation in the market," Ross said. "You get the feeling that markets are just so hot now that the cost of a direct lending deal isn't worth what it was."

Private debt typically has higher breakup fee by way of call protection that also lasts much longer than the terms normally seen in the syndicated loan market.

Lower Rates

Of that, Thoma Bravo is well aware. It has been able to lower the rate on the debt of least two of its companies -- SolarWinds and Riverbed Technology Inc. -- repeatedly as soon as the call-protection premium rolls off.

The Qlik loan is being marketed at leverage of less than five times with most of the pro forma adjustments realized by the company, Mock said. That compares with the time of the buyout when a measure of the earnings was being marketed with adjustments at $170 million for $1.1 billion of debt, about 6.5 times leverage. But even that would have been a tough sell at the time as the company's actual earnings before interest, taxes, depreciation and amortization was about $70 million.

That was one reason banks couldn't provide the same amount of debt as Ares at the time. And, even if they could have, it would have been a harder sell to convince investors to believe the pro forma numbers would be realized.

"We have executed on our restructuring plan, cut costs and the company has continued to grow at very high rates," Mock said. "It's much easier to sell this story to debt investors."

To contact the reporter on this story: Sridhar Natarajan in New York at snatarajan15@bloomberg.net.

To contact the editors responsible for this story: Nikolaj Gammeltoft at ngammeltoft@bloomberg.net, Kenneth Pringle