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Software company $1.4bn loan deal shelved on virus turmoil

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Via Financial Times

Micro Focus, one of Britain’s largest listed technology businesses, has become the latest company to postpone a debt sale due to choppy market conditions stemming from the spread of the coronavirus, shelving a $1.4bn loan that had been in the works for almost two weeks.

Micro Focus planned to refinance an existing loan coming due in 2021 that had initially supported the acquisition of Hewlett-Packard’s enterprise software division. The seven-year deal was set to be issued in both dollars and euros with a minimum of $500m and €500m for each tranche.

The company joins a growing list of loan issuers that have shelved deals after a dramatic decline in debt prices that has pushed corporate borrowing costs higher.

The US tranche had initially been launched with an expected borrowing cost of about 375 basis points above the Libor interest rate benchmark, giving the double-B rated company an all-in borrowing cost of roughly 5.5 per cent.

The average yield across the 100 largest single B- and double B-rated loan issuers rose 50bp to a 2020 high of 5.78 per cent last week, according to an index run by the Loan Syndications and Trading Association, even after a roughly 20bp fall in three-month Libor.

In a statement released on Monday, Micro Focus said it pulled the loan sale “due to adverse market conditions”, adding that it “intends to relaunch the refinancing once market conditions improve”.

It was another blow for Micro Focus, which last month announced that long-term chairman Kevin Loosemore, the architect of a series of acquisitions that briefly transformed the software business into a FTSE 100 company, would leave.

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It also said it did not expect its financial performance to improve until 2021 and that a strategic review of its sprawling operations had not yielded any asset sales.

Micro Focus specialises in buying older, low-growth software products and cutting costs to boost profitability. Its acquisition of HP’s software portfolio, including the old Autonomy business, for $8.8bn three years ago was hailed as a transformative move and a rare example of a UK technology company turning the tables on a larger US rival.

However, Micro Focus has struggled to make the deal work. The shares traded at more than £26 each in late 2017 but have crashed since and closed 5 per cent lower at 701p on Monday.

Micro Focus had $4.3bn worth of debt outstanding at the end of October. It also ranked as one of the largest companies with loans owned by collateralised loan obligations that were highlighted in a JPMorgan report in January warning about potential coronavirus fallout. CLOs are securities backed by bundles of loans.

“Until the . . . outbreak is brought under control, we see spillover into CLOs from repricing of recessionary risks,” JPMorgan analysts said in a note on Friday.

Additional reporting by Robert Smith in London

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