April 11, 2019 / 7:53 PM / a year ago

ESG principles prompt lenders to pass on NSO Group loan

NEW YORK, April 11 (LPC) - Investors’ response to a US$500m equivalent leveraged loan for Israeli cyber surveillance firm NSO Group highlights the increasing extent to which environmental, social and governance (ESG) principles are guiding banks’ and investors’ lending decisions as they start to calculate the ethical impact of investing.

Many investors declined NSO’s loan on ESG grounds after learning that the company’s primary spyware tool Pegasus had allegedly been used to target human rights dissidents and journalists, including slain Saudi journalist Jamal Khashoggi.

“If you look at the ratings and pricing, you would do it (NSO). If you look at anything else — the credit, the ESG, you should have said no,” said one loan investor. “Saudi is one of their biggest customers.”

The deal is the second loan that has run into resistance on ESG grounds recently. Bank lenders declined to participate in a loan for Venezuelan oil refiner Citgo due to US-imposed political and economic restrictions, forcing the company to turn to Jefferies and Houlihan Lokey for a US$1.2bn loan.


NSO’s co-founders Shalev Hulio and Omri Lavie and members of the company’s senior executive team announced NSO’s buyout from Francisco Partners in February, backed by Novalpina Capital and a significant number of employees.

The buyout was backed by a US$500m-equivalent loan, but arrangers Jefferies and Credit Suisse ran into opposition from the outset.

Amnesty International and six other organizations released an open letter in February, shortly after the acquisition was announced, urging Novalpina to commit to accountability for NSO Group’s past spyware abuses, including the targeting of an Amnesty International employee and the alleged targeting of Jamal Khashoggi.

This followed a lawsuit from a Saudi dissident in December, which charged that NSO helped the royal court take over his smartphone and spy on his communications with Khashoggi which NSO denied, Reuters reported.

Investors’ unwillingness to lend grew after NSO offered little information, forcing the lead banks to make a series of changes to get the deal across the line.

“It is going to be painful for the banks,” a senior banker said. “The open letter completely screwed them. Investors won’t touch it with a barge pole.”

Ultimately the loan sold at a steep discount — 90 cents on the dollar — which implies losses for the underwriting banks. The loan was initially offered at a discount of 98 when the deal launched in mid-March. The discount subsequently widened to 94, in an earlier appeal to investors, before finalizing at 90.

The deep discount suggests the deal got some orders, but it is unclear how much of the paper the banks are holding and the extent of their losses, investors said.

The deal allocated earlier this week, but market participants do not expect the loan to trade.

“We looked at it (NSO) for 10 seconds and said no. It’s not our kind of deal, I can’t imagine CLOs would like this and I don’t know anyone who actually did the deal,” a CLO manager said.

In addition to the discount, several other changes were made to NSO’s pricing and terms. The margin on the loan increased by 100bp to 700bp over Libor/Euribor. There is no Libor floor for the US dollar tranche, while the euro tranche has a 0% Euribor floor.

The tenor on the loan was also shortened to six years from seven years. A first-lien net leverage covenant was added and call protection was also revised. The loan is callable at 102 in year one and 101 in year two. Initially, the deal included soft call protection of 101 for six months.

Moody’s Investors Service put adjusted pro forma opening leverage at around 4.3 times. The loan will amortize at an annual rate of 5% and the excess cash flow sweep (the mandatory use of excess free cash flows to pay down outstanding debt), starts at 75%, sources said.

NSO’s corporate family and facility ratings are B2/B.


Venezuela-owned oil refiner Citgo also tapped non-bank lender Jefferies, along with Houlihan Lokey, to arrange a US$1.2bn term loan, after the company’s traditional bank lenders turned the deal down due to US-imposed political and economic restrictions.

Citgo is owned by state-owned Petróleos de Venezuela SA and banks were reluctant to lend to the company after a Presidential order in November 2018 banned US firms, including US banks, from making any contribution of funds, goods and services to Venezuela and President Nicolás Maduro’s administration.

Jefferies is known for stepping into aggressive highly leveraged deals after US leveraged lending guidelines forced its more traditional banking competitors to step back from some riskier transactions.

“Jefferies has had a reputation for doing deals that other banks would not, either because the structure is more aggressive or perhaps some degree of headline risk. It would appear that NSO would fit firmly — a deal that other banks might shy away from,” an investor said. (Reporting by Leela Parker Deo. Additional reporting by Kristen Haunss and Claire Ruckin. Editing by Tessa Walsh and Michelle Sierra.)

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