Private equity firms are making aggressive moves to insert clauses into loan agreements that would allow them to extract larger dividends from their portfolio companies, sparking strong resistance from lenders, according to a report by the Financial Times.
Historically, loan agreements placed strict limits on how much private equity firms could withdraw from their companies. Over time, these limits became more flexible, often based on a percentage of a company’s earnings. However, in recent weeks, firms have sought to introduce a new clause, known as the “high-water EBITDA” provision, which uses the company’s highest earnings over any 12-month period to determine how much debt it can borrow or how large a dividend it can pay out – even if the company’s earnings have since declined.
The report cites unnamed sources familiar with the matter as revealing that major private equity firms, including KKR, Brookfield, Clayton, Dubilier & Rice (CD&R), and BDT & MSD Partners, have all attempted to include the clause in recent loan agreements. However, these efforts have been met with significant pushback from lenders, and in most cases, the high-water EBITDA provision has been removed from the final agreements.
A high-water EBITDA clause reportedly appeared in draft loan agreements for KKR’s $3bn acquisition of Janney Montgomery Scott and its $4.8bn purchase of education technology company Instructure, as well as Brookfield’s $1.7bn acquisition of a unit of nVent Electric. The provision also showed up in refinancings by Wesco, owned by BDT & MSD Partners, and in CD&R’s Focus Financial deal.
In one notable case, RBC, the lead underwriter on Brookfield’s $900m term loan for its nVent investment, told an investor that the demand was strong, and if the high-water provision was an issue, they should “vote with [their] feet.” Enough investors passed on the deal, and the controversial clause was ultimately removed.
One banker involved in the Instructure financing noted that while these aggressive terms are harder to push through in today’s market, they are “not surviving” in most deals. However, the high-water EBITDA clause did make it into a $2.1bn term loan for Alliance Laundry, allowing the company to refinance debt and pay a $890m dividend to its owner, BDT & MSD, according to S&P Global and Moody’s.
The report quotes an unnamed private equity executive as saying that: “If you didn’t ask for those terms in a negotiation, you didn’t do your job,” emphasising a desire to maximise flexibility for businesses.
