Description

Rackspace Technology’s 1^st Lien Term Loan: Capturing The Apollo Discount

Summary / Situation Overview

• Rackspace is a cloud-based managed service provider (MSP) – help companies transition to and manage both public and private cloud environment while also providing higher value-add services

• Margins under near-term pressure, strong recurring revenue, disguised growth story

• Previous Apollo LBO; limited history, messy financials and high turnover in mgmt.

• FCF generative biz, no funded debt maturities until 2028 (undrawn RCF matures in 2025) allows time for the turnaround to be effectuated

• The 1^st Lien Term Loan (the “1LTL” or “term loan”) offers a 23.8% YTM and a 13.9% CY at a price of 53.79

• Net creation multiple of 3.4x 2023E Base Case Adj. EBITDA
• Net Detach of 5.3x LTM Adj. EBITDA
• ~$570 mm market value of subordinated capital (unsecured notes and equity)

Capital Structure

1^st Lien debt of 5.3x net LTM EBITDA, including the term loan and the 3.5% Senior Secured Notes (the “Secured Notes”) along with $538 mm of finance leases and obligations (primarily used to finance servers and equipment for Private Cloud).  Beneath that is $550 mm of 5.375% Senior Unsecured Notes (the “Unsecured Notes”) trading at 35.13, along with $376 mm of equity value. 

The 1st lien debt creates the Company at 3.4x Net 2023E Base Case Adj. EBITDA or 7.2x 2023E Base Case Normalized UFCF and fully detaches at 5.3x Net LTM Adj. EBITDA.  While the Unsecured Notes offer an attractive YTM of 29.1%, they create the Company at 6.3x Net 2023E Base Case 2023E Adj. EBITDA and face a significant risk of impairment in a restructuring.  The Company has substantial liquidity of $619 mm consisting of $244 mm in cash (not including restricted of $28.8 mm) and $375 mm of an undrawn Revolving Credit Facility (the “RCF” or the “Revolver”). 

The Company has no funded debt maturities until 2028 (where the entire capital stack matures), but the Revolver matures in 2025 which the Company will likely seek to extend.  This gives Rackspace significant time to allow for margins to normalize along with organic deleveraging from the FCF generated in the next 5 years.

Company Overview

            Rackspace was formed out of an Apollo take-private of Rackspace Hosting in 2016 with the goal of transitioning the business from managed hosting to focusing on the cloud outside of the ire of the public markets.  Under Apollo’s ownership, Rackspace engaged in numerous acquisitions (the biggest being TriCore for ~$350 mm – cross platform applications services provider, Datapipe for ~$1 bn – a competing MSP, and Onica for ~$300 mm – another MSP primarily focused on AWS) which expanded its capabilities and cemented it as the number one pureplay MSP for the cloud. 

            The Company currently operates across 3 segments (it is changing its org structure going forward but will touch on this later) which are Multicloud Services (82.5% of LTM revenue), Apps & Cross Platform (12.7%) and Openstack Public Cloud (4.8%).  The Multicloud segment is RXT’s bread and butter, and its revenue is primarily derived from both engaging in the resale of infrastructure from hyperscalers (AWS, Google, MSFT – the big public cloud providers) through selling server capacity on for example AWS to a customer and managed cloud services offerings across both the private and public clouds, where they help customers transition to, design, and manage across cloud environments.  The Apps & Cross Platform segment is primarily managing applications for customers on cloud infrastructure, security services, and data services; these represent much of the higher value-add services RXT is seeking to sell more of to each customer going forward.  Finally, the Openstack Public Cloud is Rackspace’s open-source public cloud which they stopped marketing to new customers in 2017 and is in runoff – this business was essentially a competitor to the hyperscalers and Rackspace realized it could not compete. 

Going forward, Rackspace has reorganized its reporting structure into Private Cloud, Public Cloud, and Openstack which will be start being shown in the 1Q23 financials.  This better reflects the way the business is segmented from a margin & operating perspective.  This is how I have thought about the business, although my model uses the prior reporting structure. 

The Private Cloud involves offering storage, computing power, and applications through cloud management (RXT helps customer manage the cloud), managed hosting (using RXT’s owned servers) and colocation (customers’ hardware in RXT datacenters); this segment is substantially more mature and seeing some customer declines as businesses transition to the public cloud or using a mix of private and public clouds.  Although a low-negative growth segment on its own, this is an essential part of the service RXT offers its customers, many of whom use both the private and public clouds and allows RXT to capture more of a customer’s overall cloud spend.  Its benefits are higher data security, better control over the cloud environment, and lower latency.  This is higher margin on a gross basis but substantially more capital intensive for RXT, as it involves the purchase & maintenance of physical infrastructure, including datacenters and servers, resulting in what should be similar FCF margins to the Public Cloud, as confirmed by expert calls. “Number one, there is no Capex involved in that business [Public Cloud] at all, right? And your old managed hosting business used to have a tremendous amount of Capex, and you'd have to invest ahead significantly where you do not have that now in the AWS business” (Former President and Chief Customer & Revenue Officer).  The Private Cloud segment will likely experience flat to LSD declining revenue going forward, as customers continue to shift resources over to the public cloud; given the contract-based recurring revenues in this segment, the decline should be fairly manageable, and many businesses will continue to use private cloud solutions in addition to the public cloud.  Management has confirmed that any additional growth Capex in this segment will be “success-based,” meaning that it is backed by a contract with a customer.     

The Public Cloud involves the resale of public cloud infrastructure from hyperscalers bundled with managed services across migration to the public cloud and designing the architecture that will be employed to managing the cloud environment once deployed, along with higher value-add services (much of this is captured currently in the Apps & Cross Platform segment) such as security, managing applications, and advanced data services.  This segment is asset-lite, as third parties (i.e., AWS) own the underlying infrastructure.  The infrastructure resale component has low gross margins, given RXT is acting as a middleman between the customer and the public cloud provider, while the services component is significantly higher margin given it provides more value-add for the customer.  Within the infrastructure resale transaction, RXT still provides value by providing the cloud computing capabilities at the same or lower cost as a customer would be able to achieve on its own through capturing volume discounts and by allowing customers to spread their spend across multiple hyperscalers, if desired, to avoid vendor lock-in.  This is a win-win for all parties involved with the customer getting the same or a lower price on the infrastructure and being able to purchase RXT’s other services while avoiding vendor lock-in with a particular cloud provider, the cloud provider getting a cheap source of customer acquisition and a low-touch sale, and RXT gets the opportunity to sell higher value-add services while locking in a capital-lite, recurring revenue stream (I will expand more on this later).  As the former Head of Business Operations at Rackspace explains “as an example, say, the customer's bill with AWS would have been an arbitrary $100. Rackspace would say, given $100 and given our pricing schedule, what Rackspace would charge the customer for the managed aspect of that is $15. So the customer pays $115 to Rackspace. Rackspace keeps $15, and Rackspace also keeps, say, $5 and passes on $95 to AWS.” 

The Public Cloud has been seeing substantial growth, as businesses seek a computing solution that is scalable (computing power can be scaled up or down), involves opex not capex, and allows for more workstreams to be outsourced.  Given that at the onset of a customer relationship, margins are likely to be lower given higher revenue from infrastructure resale vs. higher value-add services, this growth initially comes with low incremental margins.  As RXT’s Multicloud Services revenue has climbed from ~$1.8 bn in 2018 to ~$2.6 bn in 2022, segment gross margins have collapsed from 40.8% to 27.3%.  While some of this is due to new customers being less profitable, which is a temporary headwind, experts call point out that infrastructure resale is a bigger portion of associated revenues for a public cloud customer vs. hardware for a private cloud customer.  To get back to anything close to previous margin levels, RXT will therefore need to increase the amount of high margin value-add services it sells to public cloud customers. 

As the CEO said on the Q4 earnings call, “we believe for every dollar of infrastructure that on the hyperscale side, we have an opportunity to go and sell anywhere between $3 to $7 or $8 of services on top of that infrastructure over the life of the infrastructure,” this represents a large source of potential for the Company but the major question is whether they can execute on it.  Expert calls point out that the areas in which the Company seeks to compete are competitive, especially in security, but that Rackspace benefits from a strong customer service experience and intimate knowledge of cloud environments.  As a customer mentioned in an early 2022 call, “When it comes to cloud migration, the scope just naturally increases because we just started our migration in 2019. So now 100% of it is migrated so overall spend has increased. Complexity has increased number of products which we use have increased and then there are some ancillary services like DBA, pen testing, and so on.”  As customers embark on their journey to transition to the public cloud or using a multicloud solution, the magnitude of their spend increases, allowing RXT the opportunity to sell additional, higher margin services.  Furthermore, the additional value-add services Rackspace offers, namely security, data services, and application management, are advantaged by the Company’s overall high level of customer service and true expertise in managing cloud-based environments.  This, along with Rackspace’s close partnerships with the three major hyperscalers, form the basis of Rackspace’s competitive advantage, which has allowed for tremendous growth across infrastructure resale and should begin to permeate down to additional value-add services as customer relationships mature.  As customers generally direct almost all of their cloud spend (90%+) through Rackspace, the Company will have increasing opportunities to expand into additional service areas close to its core circle of competence through its ability to leverage existing customer relationships – I am not underwriting any growth due to new product offerings but this represents an additional source of upside.

Rackspace has undergone significant turnover within management and is now on its 5^th CEO since Apollo LBO’d the Company in 2016.   The new CEO, Amar Maletira, took over in late 2022 and he’s joined by a new CFO, who came aboard earlier this year, and both of whom had previously worked together at HP, and a new President of their Private Cloud segment who was formerly Chief Product and Technology Officer at Zayo Group and has been brought in to stabilize this segment.  The new management team strikes me as straight shooters, focused on getting the job done and not too promotional.  For example, the new CFO said on the most recent earnings call that “Cash flow generation is going to be a major focus for us, a major focus for me.. as a CFO of this company, my sole focus is going to be around managing cash and expenses and making sure that we're making the investments to drive our long-term growth.”  This management team is being overseen by a board primarily made up of Apollo related or employed persons, including David Sambur Apollo’s Co-head of Private Equity.  Given Apollo’s ~[60]% ownership and the substantial decline in the stock since it was brought public, I believe the Board is particularly motivated to foster value creation as much as possible.  Apollo and its representatives on the Board are likely to be especially involved in ensuring that capital is allocated into places that will generate a strong RoIIC.  With that said, Apollo’s reputation for engaging in aggressive actions vis a vis creditors is a key risk and one I will touch on in more detail later.     

 As revenue on the Public Cloud side grows and the Private Cloud remains flat-down LSD, gross margins will continue to compress.  As previously mentioned, this does not fully capture the economics of Rackspace’s transformation, given the asset-lite nature of the Public Cloud, a greater mix of infrastructure resale at the onset of a Pubic Cloud transition, and a renewed focus on selling value-add services to customers.  2023 will likely have muted performance for Rackspace, as sales cycles lengthen, and customers pull back due to the uncertain economic environment; given the recurring nature of the Company’s revenue and mission-critical aspect of its service (once a customer is on the cloud, they need access to the computing power to run their business) “core” revenue (Multicloud + Apps & Cross Platform) should still be flat to up LSD.  2023 will also be impacted by new management’s decision to exit or not renew deals where they see little potential to “land and expand” or sell additional services to customers besides infrastructure resale, especially in the small business segment.   Over the mid-term the Company will benefit from a long-term secular trend towards the public cloud, higher penetration rates of additional value-add services, and continued low capital intensity, allowing for a natural deleveraging as cash flow is used to pay down the TL or potentially engage in debt buybacks.  In my Base Case, I have net leverage through the TL falling from 5.3x currently to 3.1x by 2025E, as margins begin to normalize and the Company benefits from a bit of operating leverage on SG&A.    

Industry Overview

            Rackspace is a cloud-based managed service provider which provide customers with access to cloud computing platforms (infrastructure) and assist them in utilizing it.  As mentioned, Rackspace’s acquisitions in the space have made them the dominant player and competitors are primarily small, regional players or large-scale systems integrators and consulting firms (i.e., Accenture) with no true expertise in cloud.  The MSP market remains fragmented, and once leverage comes down to a more reasonable leverage, RXT will likely have the opportunity to further consolidate the space.  Cloud computing is being increasingly adopted across the business world and should continue to grow 20-30% in the long-term (likely some near-term slowdown due to the macro environment).

Value Chain Analysis:

As mentioned, on the Public Cloud side Rackspace operates as a value-added reseller of cloud services (provided by AWS, Microsoft Azure, Google Cloud), while on the Private Cloud side the Company generally owns and operates the infrastructure.  By aggregating demand, RXT is often able to offer customers infrastructure prices that are the same or often even less than what the customer would be able to achieve by going directly to the hyperscalers.  Further, Rackspace helps customers to spread their cloud spend across multiple providers in a cost-efficient manner, if they are seeking to avoid vendor lock-in, which is another valuable aspect of their service.  Rackspace’s customer support and the additional professional services they offer a major value driver for customers and create a competitive advantage – Rackspace is an expert in all things cloud and its services allow for resource-starved IT departments to handle mission critical activities in a cost-effective manner with responsive customer service.  Rackspace’s additional value-add services, especially in data service and managing cloud-based applications, naturally align with the customer’s resale business and are another way in which they provide value to customers.  Since customers can buy their infrastructure at the same/lower rates than they would directly and receive what is known to be excellent customer service from true experts in cloud technology, the value proposition for clients is obvious. 

            Less obvious are the benefits from the hyperscalers.  Infrastructure-as-a-Service (IaaS) is the core offering of AWS, Azure, and Google Cloud and involves the sale of computing capacity.  This is a very capital-intensive industry, involving the purchase and maintenance of servers, data centers, etc. across the world and is fiercely competitive between the three major hyperscalers.  AWS started off with a large lead in the space and Google/Microsoft have been seeking to gain ground ever since – this leads to some competition on price, including for Rackspace, as the hyperscalers fight for the same customers.  Rackspace represents both a source of significant volume and a channel for customer acquisition. 

The hyperscalers are generally in the business of selling infrastructure and are not experts in helping companies transition to the cloud, designing the best architecture for a particular use case, and providing more personalized services; with that said, to encourage cloud adoption the hyperscalers would like somebody to do this work.  This is Rackspace’s niche and why it has been able to develop such close partnerships with all of the major hyperscalers because it improves the value proposition of switching to the public cloud for potential customers.  Therefore, the hyperscalers are happy to let RXT enjoy a small markup on infrastructure resale, as it expands the TAM and provides for a better customer experience. 

On the Private Cloud side, Rackspace provides the infrastructure directly to the customer or helps them operate their own infrastructure.  In this business, the Company is valued for its customer service, expertise in cloud, and access to infrastructure – companies have the options of using Rackspace owned servers in Rackspace data centers.  Customers are increasingly transitioning from the private cloud to the public cloud but for some use cases (sensitive data, need for low latency) it remains a better fit and many companies are likely to take a multicloud approach where they use the private and public clouds.  This segment has been facing some revenue churn but should stabilize in the mid-term as the remaining customers become those who remain on the private cloud for a reason and this is mitigated in the short-term by contractual, recurring revenue streams. 

Investment Thesis

            The TL at a price of 53.79 represents an attractive opportunity, as the Market is missing that margin pressure is near-term based upon what services are sold upfront (infrastructure resale) and not as severe on FCF compared with GM.  The Market is also not giving credit for the high-quality nature of the Company’s revenue and the lack of any near-term funded debt maturities, allowing for an organic deleveraging.  The TL enjoys a YTM of 23.8%, while being top of the capital structure and creating the Company at a modest 3.4x Net 2023E Base Case Adj. EBITDA.  The potential for capital appreciation is supported by a 13.9% current yield. 

            As previously explained, Rackspace’s public cloud transactions often have lower margins upfront, as a higher percentage of a customer’s spend is devoted towards infrastructure resale compared with high value-add services.  The margin compression on the IS is related to the Company’s mix shift towards public cloud and a symptom of its growth.  Given Rackspace’s expertise in the cloud, strong customer value proposition, and highly motivated management team / BOD, I believe that in the mid-term the Company can vastly improve the penetration of value-add services.  The new CEO has made clear that this is his main priority and his commitment to exit deals where there is little hope of selling anything beyond infrastructure is a first step towards improving the sales mix.  Expert calls have validated the customer value proposition and helped elucidate what the true economics of Rackspace’s business should look in the long-term, as the growth of services outpaces infrastructure resale.  Given the uncertain economic environment, especially in tech, these changes will likely only begin to show up in the financials in 2H 2023 at the earliest and not be fully apparent until 2024-2025.  With that said, given the CY of 13.9%, one is paid to wait until this part of the thesis plays out. 

Further, the impairment of Rackspace’s FCF margins is not nearly as severe as the IS would have one believe; my estimate of Normalized UFCF margins have fallen from 18.4% in 2018 to 11.5% in 2022 compared with a ~13% decline in Non-GAAP gross margins in the Multicloud segment.  The Public Cloud segment will perpetually have lower gross margins than the Private Cloud segment, but this will be offset by the capital-lite nature of the business, leading to materially higher FCF conversion (cash CAPEX as a % of revenue has fallen from 12.0% in 2018 to 2.6% in 2022).  Even as margins have compressed and operating performance has not been great, Rackspace has managed to generate FCF, albeit not always an impressive amount.  Going forward, higher FCF conversion coupled with sustained topline growth will allow for Rackspace to supports its capital structure and begin deleveraging.  As cash flow improves, I expect the Company to take advantage of the price of the debt and engage in debt buybacks to capture the discount.

The Market does not perceive Rackspace’s revenue as high quality, despite almost all of it being recurring, or reoccurring, in nature the base of which is supported by a mission critical service.  Computing power, whether on the private or public clouds, is a mission critical service for all business, as they need it to store their data, run applications, and conduct the day-to-day of their operations.  Although the Private Cloud segment is experiencing some headwinds, revenue here is contract-based and recurring, so churn is more likely at the end of a customer’s term at which point Rackspace can switch them to a Public Cloud solution if desired.  The Public Cloud segment is also generally contract-based, although sometimes customers have shorter terms than the Private Cloud.  The strong value proposition of Rackspace’s Public Cloud offering and the level of support they provide leads to sticky customer relationships.  Given Rackspace’s reliance on value-add for much of its actual profits, it is important to diligence the stickiness of this revenue stream separately.  Although many of these services can be handled inhouse, it is not practical for often resource-starved IT departments who may lack expertise in managing cloud environments; further, there exist few competitors who can manage the entire cloud environment to the extent that Rackspace is capable of.  For example, one customer stated that “But skill set perspective, I will have to in-source many things, which currently Rackspace is doing. So if I keep the scope same, can I outsource I actually can't. I don't have a partner to outsource. If I increase my team by, let's say, 30%, 40%, and I have internal cloud architects and a DevOps architecture and so on, like insource a bit of the brain, yes, then I can outsource to another partner. So that's the difference between theory and practice” in reference to churning from Rackspace.  I believe this quote helps to demonstrate the value-add of Rackspace’s services and the benefits to the customer – lower cost, more efficient, and able to outsource areas outside of their circle of competence.  In this context, net debt of 6.2x LTM Adj. EBITDA and 5.3x net through the TL is less concerning.  By providing mission critical services that are sticky and often come with contractually recurring revenue streams, the Company should remain able to support its capital structure even in a weakening economic environment.  Although the Company may not enjoy the growth it has seen in the last few years, revenue should overall remain flat to down LSD in all but the most draconian of scenarios, providing comfort on the sustainability of its capital structure.   

In addition to the above, management has plenty of time to organically delever given there are no funded debt maturities until 2028 (undrawn RCF comes due in 2025) and the Company has $619 mm in liquidity.  Despite current poor operating performance, as margins near their trough due to the shift to the Public Cloud, RXT continues to generate positive FCF.  As new Public Cloud customers mature over the next few years and continue to engage Rackspace for value-add services in addition to infrastructure resale, margins will improve as capital intensity declines leading to substantial FCF generation.  By 2027, I project that RXT will have net leverage of 2.1x through the TL and 2.8x through the unsecured notes in my Base Case, positioning the Company for what should be a smooth refinancing process.  The 5 years until maturity gives the Company time to undergo its transformation with ample time for performance to stabilize and for debt to be paid down through FCF.    

The Market is pricing this credit as if a restructuring is imminent.  Although there are reports that some RXT lenders have begone to organize, the Company has plenty of liquidity and 5 years until any funded debt matures.  Further, the TL benefits from a 3.4x net creation multiple on 2023E EBITDA for a business Apollo LBO’d for 7.1x in 2016 which is now operating with an asset-lite business model focused on a high growth industry.  This a business with recurring revenue on a mission critical and strong organic growth but that is undergoing a transition and struggling with maintaining margins; to be conservative, I apply a 5-7x multiple on 2024E EBITDA and as expected find that the TL is covered even assuming a full draw on the Revolver with no matching increase in cash.

Risks

• Margins get squeezed on both ends by scaled customers and cloud providers
  • RXT is a cheap source of customer acquisition for cloud providers; enables buyers to achieve same/better prices with strong customer service while lowering supplier concentration
  • Shift towards higher value-add services increases both stickiness and margins
• Macro environment stalls new business
  • Able to support capital structure at current business levels
  • Strong recurring revenue base protects revenue near current levels
• Deterioration of RXT’s financial performance causes Apollo to take aggressive action, harming creditors
  • More than compensated for this risk at a price of 53.79 and a YTM of 23.8%
  • Creation value of 3.4x Net Base Case 2023E EBITDA provides strong downside protection in a restructuring scenario
  • Limited ability to move assets to unrestricted subsidiaries, engage in restricted payments, or take on priming debt
    • Further expanded on in Credit Docs Analysis: summary picture below

Catalysts

• Margin normalization through 2025
• Organic deleveraging
• Debt buybacks by company or Apollo

Why this opportunity exists?

• Market misunderstanding:
  • Apollo LBO going to trade at a discount but credit docs are fairly tight on value leakage
  • Margin degradation seen as permanent
  • Leverage levels high on an absolute basis
  • Reports of lenders organizing spooked investors

Credit Doc Analysis

Below I have summarized some of the key terms within the Credit Agreement and have bolded the ones that represent key risks. 

• Permitted Indebtedness
  • Incremental Debt under the Credit Agreement (RCF or TL)
    • MFN clause: 50 bps, all-in yield
  • Refinancing indebtedness
  • Acquisition carveout based on same leverage multiples as below
  • Capital leases
  • General basket of greater of $425 mm and 0.5x EBITDA
  • 1L debt so long as Net 1L Leverage Ratio is less than or equal to 3.1x; junior liens so long as Net Secured Leverage Ratio is less than or equal to 3.6x; other indebtedness (e.g., unsecured) so long as Interest Coverage Ratio remains above 2.0x
    • Carveout for loans incurred by non-loan party subsidiaries of greater of $250 mm and 0.3x EBITDDA
  • Permitted Securitization Financings
  • Indebtedness & Guarantees  of JV’s of greater of $425 mm and 0.5x EBITDA
  • Additionally incurred debt needs to have a mature at the same time or after the TL
    • Besides RCF borrowings
• Liens
  • Liens on subsidiaries’ assets that are not loan parties
  • Liens on the assets or equity interest of JVs
  • Liens on equity interest of, or loans to, Unrestricted Subs
  • Permitted Securitization Financings
  • Junior liens on Collateral
  • Pari Passu liens on Collateral as long as Net 1L Leverage Ratio is less than or equal to 3.1x
  • Pari Passu and junior liens on Collateral up to carveout debt amounts in Permitted Indebtedness
  • Refinancing Indebtedness: liens need to maintain priority
  • Other liens up to greater of $425 mm and 0.5x EBITDA
  • Acquisition carveout
  • Carveout for mortgage on corporate headquarters
• Permitted Investments
  • Acquisitions
  • Up to greater of $425 mm and 0.5x EBITDA plus greater of $215 mm or 0.25x EBITDA plus Cumulative Retained Excess Cash Flow + sale proceeds + equity proceeds – investments made – restricted payments – payments to junior financings
  • Investments in the equity of new entities up to $10 mm
  • Investments in JVs up to greater of $300 mm or 0.35x EBITDA (limited by 4x Net Total Leverage Ratio) plus returns from JV
  • Similar Businesses up to greater of $300 mm or 0.35x EBITDA (limited by 4.0x Net Total Leverage Ratio) plus returns
  • Investments in Unrestricted Subsidiaries up to greater of $215 mm or 0.25x EBITDA plus returns
  • Other investments so long as Net Total Leverage Ratio would not exceed 4.0x
• Restricted Payments
  • Greater of $215 mm or 0.25x EBITDA plus Cumulative Retained Excess Cash Flow + sale proceeds + equity proceeds – investments made – restricted payments – payments to junior financings
  • Pay dividends or repurchase shares up to 6.0% of Market Cap per year
  • Up to greater of $300 mm and 0.35x EBITDA
  • As long as Net Total Leverage Ratio is less than or equal to 3.75x
• Payments & Distributions to Junior Creditors
  • Refinancing
  • Normal course interest, fees, and principal payments
  • From sale of equity issuance
  • Greater of $215 mm or 0.25x EBITDA plus Cumulative Retained Excess Cash Flow + sale proceeds + equity proceeds – investments made – restricted payments – payments to junior financings
  • Up to greater $300 mm and 0.35x EBITDA
  • As long as Net Total Leverage Ratio is less than or equal to 3.75x
• Waivers; Amendment
  • Majority: 50%+ of loans and unused commitments

Catalyst

• Margin normalization through 2025
• Organic deleveraging
• Debt buybacks by company or Apollo