Valeant this morning launched a slate of proposed changes to its credit facility that will be used to facilitate financing of its $14.5 billion acquisition of Salix Pharmaceuticals, according to an SEC filing. The company has asked lenders to waive total leverage and interest coverage tests that govern incremental borrowings.
That request is part of a larger slate of changes, and lenders are offered a 25 bps fee to approve. As reported, Deutsche Bank, HSBC, Bank of Tokyo-Mitsubishi UFJ, DNB Capital Markets, and SunTrust Robinson Humphrey have committed to provide a $1 billion, five-year incremental A term loan, a $4.55 billion, seven-year incremental B term loan, and a $9.6 billion unsecured bridge loan to finance the transaction, according to filings.
In addition to waiving the 5.25x total leverage and 3x minimum interest coverage tests to allow solely for the incremental loans to help finance the acquisition, Valeant is seeking covenant changes through the first quarter of 2016, including a modification of the interest coverage ratio to 2.25x, allowing for the incurrence of $750 million of additional unsecured debt, waiving of the 5.25x leverage governor in connection with any incremental borrowings, and altering the consolidated EBITDA definition to allow for add-backs of restructuring charges and fees and expenses tied the Salix purchase. The amendment package would also:
- Waive mandatory prepayments from equity issuance used in the Salix deal or 2014 excess cash flow proceeds of roughly $250 million;
- Modify the restricted payments covenant so that refinancing of Salix’s convertible notes and settlement of related warrants won’t be deemed RPs;
- Permit the administrative agent under the credit agreement to enter into certain intercreditor agreements;
- Increase cash netting from $350 million to $600 million;
- For future permitted acquisitions change the no default and pro forma compliance conditions to the incremental from “at closing” to “at signing,” and waive incremental total leverage ratio conditions so that only the senior secured leverage ratio applies.
Ahead of this morning’s call, Valeant’s institutional loans were pegged in a 99.5/100 context, essentially unchanged from yesterday though off from levels bracketing par prior to yesterday’s M&A announcement, sources said.
Note the existing institutional loans include 50 bps of MFN protection. As of Sept. 30, 2014, Valeant had $182.3 million outstanding under its A-1 term loan due April 2016 (L+225, no LIBOR floor), $166.3 million outstanding under its A-2 term loan due April 2016 (L+225, no LIBOR floor), roughly $1.81 billion outstanding under its A-3 term loan due October 2018 (L+225, no LIBOR floor), roughly $1.09 billion outstanding under its series D-2 B term loan due February 2019 (L+275, with a 0.75% LIBOR floor), $837.5 million outstanding under its series C-2 B term loan due December 2019 (L+275, with a 0.75% LIBOR floor), and roughly $2.54 billion under its series E-1 B term loan due August 2020 (L+275, 0.75% floor). According to the commitment letter, pricing on the new TLA is tied to a leverage-based grid from L+175-225, opening at L+225. Pricing on the new TLB, meanwhile, is outlined at L+350, with a 0.75% LIBOR floor.
Pricing on the bridge loan would open at L+575, increasing 50 bps every 90 days. Note that market conditions at the time of syndication typically dictate actual price talk. The incremental TLA would amortize at a rate of 5% in the first year, 10% in the second, and at 20% thereafter. As reported, Valeant plans to acquire all of the outstanding common stock of Salix for $158 per share in cash in a transaction valued at $14.5 billion. As a result of the need to draw-down inventories, EBITDA will be artificially low in 2014 and 2015, resulting in initial pro forma net leverage of roughly 5.6x. Valeant said it is committed to reducing its net-leverage ratio to below 4x by the second half of 2016. Valeant does not expect any change to its credit ratings as a result of the transaction.
The company is currently rated BB-/Ba3. The transaction, which is expected to close in the second quarter of 2015, is subject to customary closing conditions and regulatory approval. NYSE-listed Valeant Pharmaceuticals, which is based in Laval, Canada, makes a broad range of pharmaceutical products. Salix Pharmaceuticals is based in Raleigh, N.C and is rated B/B1. – Staff reports