ESG principles encourage lenders to pass on the NSO group loan

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NEW YORK, April 11 (LPC) – Investor response to a leveraged loan equivalent to US $ 500 million for Israeli cybersurveillance firm NSO Group underscores how environmental, social and governance (ESG) principles are guide bank lending and investor decisions as they begin to calculate the ethical impact of investing.

Many investors turned down NSO’s loan for ESG reasons after learning that the company’s main spyware tool, Pegasus, was used to target human rights dissidents and journalists, including the murdered Saudi journalist Jamal Khashoggi.

“If you look at the odds and the prices, you would (NSO). If you look at something else – credit, ESG, you should have said no, ”said one loan investor. “Saudi Arabia is one of their biggest customers. “

The deal is the second loan that has recently encountered resistance for ESG reasons. Bank lenders refused to participate in a loan for Venezuelan oil refiner Citgo due to political and economic restrictions imposed by the United States, forcing the company to turn to Jefferies and Houlihan Lokey for a $ 1.2 billion loan. of dollars.

CHECKED HISTORY

NSO co-founders Shalev Hulio and Omri Lavie, and members of the company’s management team announced the takeover of NSO from Francisco Partners in February, backed by Novalpina Capital and a significant number of employees.

The takeover was backed by a loan equivalent to $ 500 million, but arrangers Jefferies and Credit Suisse faced opposition from the start.

Amnesty International and six other organizations published an open letter in February, shortly after announcing the acquisition, urging Novalpina to commit to accountability for the NSO Group’s past spyware abuses, including targeting an Amnesty International employee and the alleged targeting of Jamal Khashoggi.

This followed a lawsuit filed by a Saudi dissident in December, which accused NSO of helping the royal court reclaim his smartphone and spy on his communications with Khashoggi, which NSO has denied, Reuters reported.

Investor reluctance to lend grew after NSO provided little information, forcing lead banks to make a series of changes to push through the deal.

“This is going to be painful for the banks,” said a senior banker. “The open letter screwed them up completely. Investors will not touch it with a barge pole.

In the end, the loan sold at a steep discount – 90 cents on the dollar – implying losses for the underwriting banks. The loan was initially offered at a discount of 98 when the deal was launched in mid-March. The discount then widened to 94, in an initial appeal to investors, before finalizing at 90.

The steep haircut suggests the deal has secured a few orders, but it’s unclear how much paper the banks are holding and the extent of their losses, investors said.

The deal was awarded earlier this week, but market participants don’t expect the loan to trade.

“We watched it (NSO) for 10 seconds and said no. It’s not our kind of deal, I can’t imagine the CLOs would like this and I don’t know anyone who actually made the deal, ”said a CLO official.

In addition to the discount, several other changes have been made to NSO’s prices and terms. The margin on the loan increased from 100bp to 700bp against the Libor / Euribor. There is no Libor floor for the US dollar tranche, while the Euro tranche has a 0% Euribor floor.

The loan term was also shortened from seven years to six years. A senior net indebtedness clause has been added and call protection has also been revised. The loan is repayable at 102 in the first year and at 101 in the second year. Initially, the deal included soft 101 call protection for six months.

Moody’s Investors Service estimated the adjusted pro forma opening leverage at approximately 4.3 times. The loan will be amortized at an annual rate of 5% and the excess cash flow sweep (the mandatory use of excess free cash flow to repay outstanding debt) begins at 75%, sources said.

NSO’s family of companies and facilities ratings are B2 / B.

CITGO

Venezuela-owned oil refiner Citgo also called on non-bank lender Jefferies, as well as Houlihan Lokey, to arrange a $ 1.2 billion term loan, after the company’s traditional bank lenders refused. agreement due to political and economic restrictions imposed by the United States.

Citgo is owned by state-owned Petróleos de Venezuela SA and banks were reluctant to lend to the company after a November 2018 presidential decree banned US companies, including US banks, from paying funds, assets and services to Venezuela and to President Nicolás. Maduro’s administration.

Jefferies is known to engage in aggressive, high-leverage transactions after U.S. leverage lending guidelines forced its more traditional banking competitors to pull out of some riskier transactions.

“Jefferies has a reputation for doing deals that other banks wouldn’t, either because the structure is more aggressive or maybe some degree of overall risk. It looks like NSO would be a perfect fit – a deal other banks might avoid, ”said one investor. (Reporting by Leela Parker Deo. Additional reporting by Kristen Haunss and Claire Ruckin. Editing by Tessa Walsh and Michelle Sierra.)

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