Hilton Grand Vacations Inc. (HGV) disclosed that it has entered into a commitment letter with Bank of America, Deutsche Bank and Barclays that outlines a $1.3 billion, seven-year covenant-lite senior secured term loan, a $675 million senior secured bridge loan and an $800 million revolver that will be used in connection with the company’s previously announced planned acquisition of Diamond Resorts Holdings, LLC.
According to the commitment letter, pricing on the term loan is outlined at L+250, with a 0.50% Libor floor. Pricing on the bridge, meanwhile, is outlined to open at L+450, with 50 basis point step-ups every three months. And pricing on the revolver is tied to a leverage-based grid, at L+175-350, with a 0.25% floor.
The revolver is outlined to be covered by a first-lien leverage covenant set at 3.75x through fiscal quarter Dec. 31, 2021; 3.5x through March 31, 2022; 3.25x through Sept. 30, 2022; and 3x thereafter. The revolver is also set to include an interest coverage ratio initially set at 1.25x, with step-ups to 1.5x and 1.75x.
According to an investor presentation, pro forma leverage is expected to be around 6.5x, with a target of returning to 3x within 24 months.
Meanwhile, S&P Global Ratings has placed HGV's ratings, including the company's BB issuer credit and issue level rating on CreditWatch, with negative implications, citing the probability that the ratings agency could lower the BB issuer credit rating due to significantly higher leverage anticipated from the acquisition. Ratings said it estimates that HGV will need to refinance or assume about $1.95 billion of Diamond's corporate debt at a time when the target's EBITDA generation is diminished. On the other hand, Ratings has placed all of Diamond Resorts International's ratings, including its CCC+ issuer credit, B- senior secured, and CCC- senior unsecured ratings on CreditWatch, with positive implications, reflecting Diamond's planned acquisition by a higher-rated entity (BB/Ba2) as well as the anticipated repayment or assumption of Diamond's debt.
Hilton plans to acquire Diamond Resorts International from funds managed by affiliates of Apollo Global Management, funds managed by affiliates of Reverence Capital Partners and other Diamond stockholders, in a stock-based transaction with an equity value of roughly $1.4 billion. Under the terms of the agreement, the Apollo funds and other Diamond stockholders will receive 34.5 million shares of HGV common stock, subject to customary adjustments. The transaction is expected to close in the summer of 2021.
As of Dec. 31, 2020, Hilton had $177 million outstanding under its term loan A due November 2023 and $660 million outstanding under its $800 million revolver due November 2023.
In December, Hilton entered into an amendment to its pro rata credit facility to provide a temporary waiver from the total first-lien net leverage financial covenant beginning on Jan. 1, 2021. The waiver period runs through Oct. 1, 2021, but can be terminated by the borrower at any time prior. During the waiver period, the borrower must maintain a liquidity level of at least $175 million. The borrower is also not permitted to declare or make restricted payments to other restricted subsidiaries during the waiver period. During the waiver period, pricing on the facility opens at L+350, versus previous pricing at L+200.
Hilton Grand Vacations is rated BB/Ba2, while Diamond Resorts is rated CCC+/Caa1.
