Opportunistic RCF provides acquisition friendly ‘carve-out’ terms
The challenge
The company’s previous facility of £900m served two key purposes. Firstly it provided backstop liquidity, and secondly it provided potential funding for future M&A. This facility was put in place prior to the acquisition of Standard Life Assurance Limited (SLAL) in 2018. It was necessary to refinance this existing facility into a larger facility, given the increase in size and scale of the company had more than tripled.
The following factors supported the need for refinancing:
- Increase in size and scale of the company and therefore increase in the backstop liquidity.
- A £600m acquisition finance facility expired on 30th June 2019 (reducing the Group’s undrawn reserves).
- The favourable acquisition-friendly clause of permitting one Class 1 acquisition and a one-time ability to trigger ‘certain funds’ without bank consent was used for the SLAL acquisition in 2018, and bank approval would be required for its reinstatement for use with any future acquisition.
- The previous £900m facility was agreed in 2016 when Phoenix Group was a different and much smaller company. As of 31st December 2018, Phoenix Group had a market cap of £4bn (£2bn in 2015), assets under management of £226bn (£47bn in 2015).
- The margin on the group’s £900m bank debt facility of 110bp did not reflect the improved credit profile of the group and indications from the company’s key relationship banks suggested that a reduced margin could be negotiated.
The solution
In early 2019 loan market conditions were attractive, with high levels of liquidity and low margins. Refinancing offered an opportunity to improve several of the key non-financial terms of the facility. These conditions, combined with momentum following the acquisition of Standard Life in 2018, resulted in Phoenix Group being opportunistic and deciding to refinance the existing £900m revolving credit facility (RCF) on advantageous terms. The existing facility was due to expire in three years (June 2022).
Best practice and innovation
The refinanced facility is unique due to the innovative acquisition-friendly carve-outs. The principal benefit of these carve outs is the use of the RCF as a funding tool for Class 1 acquisitions without the need for either bank approvals or the need for a separate acquisition financing facility, thereby reducing leak risk, deal complexity and the need to commit to bond take-out.
Phoenix treasury and legal teams collectively used their technical competence to deliver a very innovative multipurpose facility with terms unheard of in the market. The treasury team persevered with many obstacles and was determined to get the best, most flexible deal executed for the company. Many barriers were encountered throughout the refinancing process, which included:
- Dealing with bank coordinators and pushing back on their comments.
- Overcoming timing requirements and executing the transaction in a short timeframe with a tight timetable (senior management were determined to sign the new facility before the end of H1 2019 to coincide with HY2019 reporting and results announcements).
- Three banks pulled out of the deal due to the tight margins and unusual terms. This showed the extent to which banks were being stretched and the tightness of the margins achieved.
“The team modelled several refinancing options over a five-year horizon. Of the options considered, refinancing the existing £900m facility into a larger acquisition-friendly facility was the cheapest option with an estimated £14m cost saving over the five-year period given certain scenario,” explains Hana Harrison, Assistant Treasurer and Head of Funding.
Key benefits
- Margins and fees greatly reduced.
- Unique acquisition-friendly ‘carve-out’ terms.
- Ability to negotiate clauses.
- Improved resilience from a regulatory perspective.
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