NEW YORK, Sept 15 (Reuters) - US software security firm McAfee LLC is raising US$4.75bn of new leveraged loans to finance a dividend payment of around US$2bn and refinance existing debt as the company prepares for an Initial Public Offering (IPO) as soon as next year, sources familiar with the deal said on Thursday.
McAfee, which is owned by private equity firm TPG Capital (51%) and computer hardware giant Intel (49%), is raising loans, which are more flexible and easier to repay than bonds as it discusses a 2018 equity listing with banks, a source close to the deal said.
The US$4.75bn of loans will refinance US$2.2bn of debt that financed McAfee’s spinoff from parent Intel, which was completed on April 3. The dividend payment of around US$2bn is one of the largest dividend payments on record, according to Thomson Reuters LPC data.
The deal brings the total volume of dividend recapitalizations this year to US$11.3bn, compared to US$24.4bn in 2016, the data shows.
Intel provided the initial financing for the spinoff with promissory notes due to the complexity of the deal and the absence of audited financials, which are generally required for agencies to rate companies’ debt. The notes paid a relatively high interest rate of 7%.
McAfee completed its audits in July, two sources said. Strong debt markets and the company’s relatively low adjusted leverage are now allowing McAfee to raise the loan, which is new money for the company, and will reduce its borrowing costs substantially as well as paying the dividend to shareholders.
Although McAfee’s financing is being marketed as a dividend deal, its pre-IPO financing is not a traditional recapitalization. Intel’s initial provision of McAfee’s debt means this is the first time investors will be gaining exposure to the company.
The US$2bn dividend payment will also partly refinance some of the equity that TPG used to buy the company, a senior banker said.
The US$4.75bn in loans include a US$3.05bn first-lien term loan, a €375m (US$450m) first-lien term loan, a US$750m second-lien term loan and a US$500m multi-currency revolving credit facility. Morgan Stanley is leading the first-lien debt while JP Morgan is leading the second-lien loan.
A euro tranche was added during syndication allowing McAfee to broaden its currency exposure after reverse enquiry from European investors, a person familiar with the matter said.
The deal will increase McAfee’s adjusted leverage from 4x to less than 6x, the person said. Although loan investors would have supported leverage of around 7x, the company opted for a lower multiple to appeal to equity investors as the company prepares for its IPO, the first source said.
The US leveraged loan market has been remarkably strong this year with relatively little new acquisition financing. Investors are responding well to the new money deal and the chance to gain exposure to McAfee, after Intel initially provided the original financing, the second person familiar with the matter said.
The leverage levels and pricing are also attractive to investors, who prefer lending to larger, more liquid loans. The deal, which launched on September 7, has already lined up several large orders before its commitment deadline of September 21, sources said.
Pricing guidance on the first-lien loans is circulating in the 475bp-400bp over Libor and Euribor range. The interest rate on the second-lien loan is expected to be in the 775bp-800bp range.
McAfee opted to line up a second-lien loan rather than issuing high-yield bonds as the loans can be repaid earlier than bonds, which have non-call provisions.
Loan investors view an IPO as a positive credit event as they expect some of the loan to be repaid with the proceeds.
McAfee’s new money loan is proving popular with investors as the liquidity in US leveraged loan market has otherwise been focused on refinancing and repricing existing loans. There has been relatively little new money issuance to date as many buyouts have been secondary or tertiary deals with existing debt.
Intel announced the US$7.7bn acquisition of McAfee in August 2010. The spin-off, which was announced in September 2016 and completed in April, was originally valued at US$4.2bn, according to Intel.
Intel considers McAfee a strategic asset and that there is no interest in currently exiting its stake in the company, a source close to Intel said.
Intel, TPG Capital, Morgan Stanley and JP Morgan declined to comment. (Reporting by Jonathan Schwarzberg; Editing By Tessa Walsh and Michelle Sierra)