Banks press on with ConvergeOne loan despite fraud allegations

By Jonathan Schwarzberg

NEW YORK, Feb 1 (LPC) - Banks are planning to relaunch a US$1.275bn hung deal backing information technology services provider ConvergeOne’s buyout by private equity firm CVC Partners this month, despite reports of a potential fraud at the company.

ConvergeOne has reported strong earnings, but is looking at a potential US$11m inventory write-down tied to potential fraud from an employee, according to press reports.

Investors are expected to support the deal as the company’s earnings far outweigh the size of the fraud, two sources familiar with the transaction said.

“It’s really not material at all when you look at the size of the company,” one of the sources said.

ConvergeOne is a global IT services provider of collaboration and technology systems for large and medium companies and helps customers to transform their digital infrastructure and realize a return on investment.

The company generated US$1.4bn of revenue in the twelve month period ending September 30, according to Refinitiv data, and third quarter revenue is 65% higher year-over-year at US$404.8m.

Moody’s expects sales of slightly below US$1.8bn in 2018, according to a November 26 note.

ConvergeOne originally launched the loan on November 28, with a commitment deadline of December 11, but the banks and CVC decided to postpone the deal to wait for better market conditions as volatility spiked across the markets.

Banks initially planned to relaunch the deal in late January but are now looking at mid-February, following an audit designed to confirm that the write-down was an isolated incident, a source said.

Investors are still waiting for the deal to relaunch, but said there has been a lot of noise following the recent reports. While US$11m may not sway a decision to invest one way or another, an explanation is needed, investors said.

“That number isn’t a big deal in the grand scheme of things, but they need a solid explanation before they relaunch,” an investor said.

The loan was pulled in December after secondary loan prices sank in the fourth quarter amid rising equity market volatility. LPC’s index of the 100 most heavily traded loans dropped to a multi-year low of 94.57 in late December after trading at 98.91 in early October. The index bounced back in January to 97.05 on January 9 and was at 96.67 on January 29.

In January, banks funded ConvergeOne’s buyout loans after CVC increased the amount of equity it was investing. This allowed the company to reduce leverage by increasing the first-lien loan to US$960m from US$925m and cutting the second-lien loan to US$275m from US$350m.

The first-lien loan was priced at 500bp over Libor while the second-lien loan priced at 850bp over Libor. The issuer had initially floated guidance of 450bp over Libor for the first-lien loan and pricing in the 825bp-850bp range on the second-lien loan.

Deutsche Bank is leading the first-lien loan while UBS is leading the second-lien portion.

MARKET TURBULENCE

ConvergeOne is not the only US deal to run into volatility in the loan market as the wider capital markets stalled in December. This prompted a pricing correction in the loan market, and some banks had to offer heavy discounts to get unsold loans off their book.

Retail investors have been fleeing leveraged loans and December saw the largest single month of withdrawals on record. In the week ending January 30, investors withdrew US$934.5m from loan funds in the eleventh consecutive week of outflows.

A US$500m term loan backing private equity firm First Reserve’s purchase of a 50% share of energy company Blue Racer Midstream also got stuck in December and is expected to be sold privately without being re-syndicated.

JP Morgan sold a US$210m term loan that was downsized from US$280m backing private equity firm Vista Global’s acquisition of aircraft firm XO Management at a deep discount of 93 in December.

Private equity firm Apollo also went to the market in late November to arrange a US$275m loan to back the acquisition of US$1bn of infrastructure assets from General Electric. This loan also got held up during syndication amid the volatility with banks funding the deal. Royal Bank of Canada, BMO and Goldman Sachs led the transaction.

Apollo allowed the transaction to be restructured and then fully paid down the loan shortly after it was issued.

“Apollo was particularly helpful given the back up in the market,” a source familiar with the deal said. (Reporting by Jonathan Schwarzberg. Editing by Tessa Walsh)