Business Context and Reporting Period
Company: Virtu Financial, Inc.
Filing Type: Form 8-K (Current Report)
Date of Report: June 30, 2017
Event: Entry into material definitive agreements to finance the pending acquisition of KCG Holdings, Inc. ("KCG").
Key Financial Metrics and Debt Structure
This filing details the establishment of new debt facilities rather than reporting operational financial results (revenue, profit, or cash flow) for the period.
- Escrow Term Loan: $610.0 million term loan entered into by Orchestra Borrower LLC (a Virtu subsidiary). Proceeds are held in escrow pending the KCG acquisition.
- Initial Term Loan: $540.0 million first lien senior secured term loan under an amended and restated credit agreement.
- Revolving Facility: Existing first lien senior secured revolving credit facility continues until the acquisition closes.
- Incremental Capacity: Borrower may request up to $200.0 million in additional incremental facilities subject to covenant compliance.
- Interest Rates (Escrow Term Loan): 1.875% per annum until August 2, 2017; thereafter LIBOR (1.00% floor) + 3.75%.
- Interest Rates (Amended Facility): Term loans at Base Rate (2.00% floor) + 2.75% or LIBOR (1.00% floor) + 3.75%. Revolving loans at Base Rate (1.00% floor) + 2.00% or LIBOR (0% floor) + 3.00%.
Material Changes Versus Prior Period
The filing represents a significant restructuring of Virtu's capital structure to facilitate the KCG acquisition:
- New Debt Instrument: Creation of a $610.0 million escrowed term loan specifically for the acquisition.
- Covenant Adjustments:
- Pre-Acquisition: Maximum total net leverage ratio of 2.75 to 1.0; minimum interest coverage ratio of 3.00 to 1.0.
- Post-Acquisition: Maximum total leverage ratio increases to 5.00 to 1.0, with step-downs to 4.25 (2019), 3.50 (2020), and 3.25 (2021). Minimum interest coverage ratio adjusts to 2.75 to 1.0, stepping up to 3.00 to 1.0 in 2019.
- Amortization Changes: Post-acquisition, the Term Loan Facility requires annual amortization payments equal to 7.5% of the Initial Term Loan principal plus 7.5% of the Escrow Term Loan principal for the first four anniversaries.
- Prepayment Requirements: Post-acquisition, 50% of quarterly excess cash flow must be used for prepayment (reducing to 25% or 0% based on leverage ratios).
Guidance, Outlook, and Risks
Management Commentary and Use of Proceeds: The gross proceeds from the Escrow Term Loan are escrowed to finance the KCG acquisition and repay KCG's existing indebtedness. Upon closing the acquisition and satisfying release conditions, the Escrow Term Loan will be assumed by the Borrower under the Amended and Restated Credit Agreement.
Restrictive Covenants: The Amended and Restated Credit Agreement imposes limitations on incurring additional debt, creating liens, making investments/acquisitions, paying dividends, and engaging in affiliate transactions. However, it includes a new restricted payment basket permitting regular quarterly distributions of up to $46.3 million for the first four fiscal quarters post-acquisition.
Risks and Contingencies:
If the "Escrow Release Conditions" (including the consummation of the merger and repayment of KCG's existing debt) are not met by the "Escrow End Date" (January 31, 2018, or earlier), the escrowed funds will be used to repay the Escrow Term Loan at 99.875% of par plus accrued interest, and the loan will become immediately due.
Forward-Looking Statements: The report contains forward-looking statements subject to uncertainties regarding the acquisition and market conditions. Virtu does not undertake to update these statements.
Key Facts for Investor Verification
- Verify the status of the KCG Holdings acquisition and whether the "Escrow Release Conditions" have been satisfied.
- Monitor the company's compliance with the post-acquisition leverage ratio covenant (initially 5.00 to 1.0) and interest coverage ratio (2.75 to 1.0).
- Confirm the timing of the "Escrow Assumption" to understand when the $610.0 million loan transitions from escrow to the consolidated balance sheet.
- Review the impact of the new amortization schedule (7.5% annual payments on both term loans) on future liquidity.
- Check for any amendments to the Merger Agreement that could trigger the early repayment of the Escrow Term Loan.