Clearlake Capital Group’s Quest Software is running its second debt exchange in three months, offering holders of its fifth-priority loan a below-par swap into a new 3.5-out term loan that will sit ahead of the sponsor’s fourth-out.
That fifth-out tranche was formed just this May when existing second-lien lenders exchanged into new first-lien fifth-out at par as part of a $350 million injection of new capital to fill the hole left by persistent operational cash deficits.
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By mid-2024, Quest’s debt load had ballooned to more than $3.5 billion, up from $2.1 billion when Clearlake bought the business in early 2022, according to S&P Global Ratings. S&P cites the impact of a weak macro environment on corporate IT spend, as well as Quest’s efforts to transition from sales of one-time licenses to a recurring revenue model.
A logical value creation effort, but one that’s fallen short of plan: “For nearly three fiscal years, Quest reported a revenue decline at a moderate pace in the low-single-digit percent area while ACR/ARR continued to grow in the mid-single-digit percent area. Although the firm has been able to grow its SaaS and term licenses revenue, the growth has not been sufficient to offset persistent weakness in perpetual licenses … due to a shift to a subscription-based revenue model.”
As part of the May exchange, consenting creditors (90 percent of first-lien and 65 percent of second-lien holders) exchanged into a new first-lien second-out at 92 cents on the dollar. First-lien lenders left out of negotiations were allowed to swap 30 percent of their exposure into second-out at 77 cents and the balance into third-out at 77.
The new loan is paying 6.75 percent in-kind and cash interest of S+100.
Clearlake also rolled its first-lien holding into a fourth-out at par, but with a preferential interest arrangement, reports Bloomberg.
Despite the improved liquidity, S&P cautioned that leverage “remains elevated at around 11x” and that “the company’s elevated leverage, business execution risks, and weak cash generation after debt servicing could make its long-term capital structure unsustainable.”
It didn’t take long to prove out that prediction: This month’s exchange will allow holders of fifth-priority paper to swap into the higher-ranking debt at 85 cents on the dollar, further reducing stated debt. The new 3.5-out sits between the third- and fourth-out layers and subordinates Clearlake’s own fourth-out to make room.
In between the busy liability management schedule, Clearlake has also been exploring various options for the business. Bloomberg previously reported that the firm has considered combining parts of portfolio company RSA Security with Quest, a possible minority sale, or a divestiture of Quest’s One Identity unit.