At the height of the pandemic in March and April, the broadly syndicated loan market seized up, merger and acquisition activity stalled and companies went into survival mode.
At this time, private equity firm Hellman & Friedman continued to move forward with its US$1.15bn purchase of Checkmarx, a software security company.
While large acquisition such as this are usually financed in the traditional syndicated market, the company needed a more tailored package beyond a vanilla, Ebitda-based leveraged loan, as well as a certainty of execution at a time when the Covid-19 crisis was forcing institutional investors to shy away from committing to deals.
Step in Owl Rock Capital Partners, a direct lending firm. Owl Rock underwrote a US$50m revolving credit facility and a US$250m first-lien recurring revenue term loan, pricing at 775bp over Libor with a 1% floor and 97 OID.
The lender was able to provide certainty to the sponsor on terms and pricing through one of the most difficult economic periods in history, as well as provide a bespoke documentation package.
“When Covid-19 was becoming a major issue, the markets started to get fragile. Even if the banks are willing to underwrite, they were not providing price certainty,” said Craig Packer, co-founder of Owl Rock.
Despite the headwinds caused by the pandemic, Checkmarx was keen to continue to invest heavily in its growth. The company manages a software-as-a-service business, locking in revenue from subscriptions from some of the largest companies in the world, including Salesforce and Deloitte.
Many companies are prioritising cybersecurity, where breaches can be ruinous to a company’s bottom line and reputation. A recurring revenue term loan meant the financing was pegged to the borrower’s growth projections being met.
The documentation includes a covenant ensuring the company has a minimum amount of liquidity. The package also includes a recurring leverage ratio covenant reflecting the business’s subscription model, which converts into a conventional unitranche structure with a typical net leverage ratio as the company increases its Ebitda.
Software companies are in the wheelhouse of Owl Rock. The direct lending firm manages a technology lending strategy which has US$4.5bn in assets under management.
“When there was incredible disruption and instability in the economy, we had the wherewithal, conviction and strength to get companies and sponsors to trust us to be their bank and financing source. It speaks to where we are in the evolution of the leverage finance market that so many of these large deals are now going to direct lenders,” said Packer.
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