Business Context and Reporting Period
This Form 8-K Current Report, dated June 16, 2017, is filed by Virtu Financial, Inc. (Virtu). The report details the completion of a debt offering by Virtu's wholly owned subsidiaries, Orchestra Borrower LLC and Orchestra Co-Issuer, Inc., to finance the pending acquisition of KCG Holdings, Inc. (KCG).
Key Financial Metrics and Debt Structure
- Debt Issuance: $500 million aggregate principal amount of 6.750% Senior Secured Second Lien Notes due 2022.
- Interest Rate: 6.750% per annum, payable semi-annually beginning December 15, 2017.
- Maturity Date: June 15, 2022.
- Use of Proceeds: Funds are currently held in escrow to finance the KCG acquisition and repay certain indebtedness of Virtu and KCG upon release.
- Guarantees: Currently unguaranteed by Virtu Financial LLC. Upon the closing of the KCG acquisition (Effective Date), obligations will be assumed by VFH Parent LLC and fully guaranteed by Virtu Financial LLC and its subsidiaries.
- Collateral: Currently secured by a first-priority lien on the escrow account. Post-acquisition, secured by second-priority liens on substantially all assets of the Issuers and Guarantors.
Material Changes and Transaction Terms
The primary material change is the entry into a definitive agreement for the $500 million Notes. Key terms include:
- Escrow Arrangement: Gross proceeds are escrowed until the KCG acquisition closes. The escrow agent must release funds by the "Escrow End Date" (four business days following January 31, 2018) if conditions are met.
- Redemption Provisions:
- Make-Whole: Prior to June 15, 2019, redeemable at 100% plus accrued interest and a make-whole premium.
- Equity Proceeds: Prior to June 15, 2019, up to 35% of principal may be redeemed at 106.750% using equity offering proceeds.
- Call Schedule: On or after June 15, 2019, redemption prices decline from 103.375% (2019) to 100.000% (2021 and thereafter).
- Special Mandatory Redemption: Required if the KCG acquisition fails, escrow release conditions are not met, or top-up obligations are not satisfied. Redemption price is 100% of issue price plus accrued interest.
- Change of Control: Triggers a mandatory offer to purchase Notes at 101% of principal plus accrued interest.
Guidance, Risks, and Covenants
The filing contains forward-looking statements regarding the KCG acquisition and the release of escrowed funds, noting that actual results may differ due to uncertainties.
Covenants: The Indenture restricts the Issuers and Guarantors from incurring additional indebtedness, paying dividends, making restricted payments, creating liens, entering affiliate transactions, or merging without compliance.
Risks: The release of funds is contingent on the successful consummation of the KCG merger. If the merger is terminated or conditions are not met, the Notes must be redeemed from the escrow account.
Investor Verification Checklist
- Verify the status of the KCG Holdings acquisition and whether the "Escrow Release Conditions" have been satisfied.
- Confirm the timeline for the release of escrowed funds, noting the "Escrow End Date" of early February 2018.
- Review the full text of the Indenture (to be filed in the next Form 10-Q) for specific exceptions to covenants and guarantees.
- Monitor Virtu's ability to meet "Top Up Obligations" to ensure the escrow account remains sufficient to redeem the Notes if the acquisition is delayed.
- Assess the impact of the new $500 million second-lien debt on Virtu's overall leverage and liquidity post-acquisition.