WEX Inc. Form 8-K Summary: Acquisition and Financing
Business Context and Reporting Period
This Current Report on Form 8-K, dated July 1, 2016, details the completion of a material acquisition and the associated financing arrangements by WEX Inc. The filing reports on the closing of the acquisition of WP Mustang Topco LLC (the "Target") and Warburg Pincus Private Equity XI (Lexington), LLC (the "Blocker"), collectively referred to as the "Acquisition."
Key Financial Metrics and Capital Structure
The filing outlines significant changes to the Company's capital structure to fund the Acquisition:
- Acquisition Consideration: Total cash consideration of approximately $1.1 billion, plus the issuance of 4,011,672 shares of common stock (representing approximately 9.4% of outstanding stock post-transaction). $15 million of cash consideration was placed in escrow.
- New Debt Facilities (Credit Agreement):
- Tranche A Term Loan: $455.0 million (matures July 1, 2021).
- Tranche B Term Loan: $1,200.0 million (matures July 1, 2023).
- Revolving Credit Facility: $470.0 million (terminates July 1, 2021), with a $250 million sublimit for letters of credit.
- Drawdowns: On July 1, 2016, the Company borrowed the full amount of Tranche A ($455.0 million), the full amount of Tranche B ($1,200.0 million), and $220.0 million under the revolving facility.
- Existing Debt: The Company has $400 million aggregate principal amount of 4.75% Senior Notes due 2023, which were amended to include new subsidiary guarantors and secured on an equal and ratable basis with the new Credit Agreement.
- Interest Rates: Initial margins range from 3.25% to 3.50% over the Eurocurrency Rate for term loans, and 2.25% to 2.50% over the base rate for alternative rate loans.
Material Changes Versus Prior Period
The primary material change is the termination of the Prior Credit Agreement (dated August 22, 2014) and the replacement with the new Credit Agreement. All outstanding amounts under the Prior Credit Agreement were repaid in full on July 1, 2016, with no early termination penalties incurred. Additionally, the Company's equity base increased by approximately 9.4% due to the issuance of shares to the sellers of the Target.
Guidance, Covenants, and Risks
The filing does not provide specific financial guidance or outlook for future periods. However, it details strict financial covenants and risks associated with the new debt:
- Financial Covenants: The Company must maintain a consolidated EBITDA to consolidated interest charge coverage ratio of no less than 3.25 to 1.00. The consolidated funded indebtedness to consolidated EBITDA ratio is capped at 5.40 to 1.00 initially, stepping down to 4.00 to 1.00 by December 31, 2019.
- Prepayment Obligations: The Company is required to prepay Tranche B term loans with 50% of annual Excess Cash Flow (subject to reduction based on leverage ratios) and 100% of net cash proceeds from certain asset sales or debt issuances.
- Investor Rights: An Investor Rights Agreement (IRA) was entered into with Warburg Pincus entities. This grants the right to nominate a Board member as long as they hold stock with a market value of $200 million or more. It also includes lock-up provisions restricting share transfers for 180 days to one year.
- Events of Default: Standard events include non-payment, covenant violations, and specific regulatory actions against WEX Bank. Upon default, lenders may declare all obligations immediately due and payable.
Key Facts for Investor Verification
- Verify the pro forma financial impact of the $1.1 billion cash outlay and the new debt load on the Company's leverage ratios, noting the initial 5.40x debt-to-EBITDA cap.
- Confirm the dilution impact of the 4,011,672 new shares issued to Warburg Pincus entities.
- Monitor the Company's ability to meet the mandatory prepayment requirements based on Excess Cash Flow and asset sale proceeds.
- Review the upcoming filing of pro forma financial information (due within 71 days) to assess the combined entity's financial health.
- Assess the implications of the Investor Rights Agreement on corporate governance, specifically the guaranteed board seat for Warburg Pincus affiliates.