Warner Music Group has successfully completed a refinancing that will reduce its annual interest payments by about $43 million annually, Billboard estimates.
As well as lowering interest payments, the world's third largest music company is also making partial principal repayments to help strengthen its balance sheet and has negotiated additioinnal flexibility to raise new funds, should the company need it.
The news comes on the same day that news broke of WMG's restructuring - both of which point to the company becoming a more profitable and efficient enterprise in the coming year.
For its refinancing Warner Music secured a $600 million senior secured term loan, which carries interest payments of 5.25% annually. The loan matures Nov. 1, 2018.
In addition, it also issued $500 million in senior secured notes, carrying 6% interest payments; and 175 million euro ($227 million) senior secured notes at 6.25%. Both debt offerings mature in Jan. 15, 2021.
The term loan carries interest payments of about $31.5 million annually, while the dollar denominated notes carry about $30 million in annual interest payments and the euro denominated notes carry about $14.2 million in interest payments.
This $1.327 billion in new debt replaces two tranches of debt totaling $1.25 billion paying 9.5% in interest and both due to mature in 2016.
Of the initial debt raised to pay for the acquisition of Warner Music by Len Blavatnik's Access Industries in July 2011, these two tranches remain in place: $765 million in unsecured notes, carrying 11.5% in interest and due in 2018; $150 million in unsecured holding notes carrying 13.75% in interest and due in 2019.
All this means total annual interest payments Warner Music must make now total about $184 million versus $227.5 million before the refinancing, a reduction of about $43 million, Billboard estimates.
In addition as part of its refinancing effort, the Warner Music Group was able to negotiate the removal of certain restrictive covenants from the notes, which among other things granted the company the ability to increase its capacity to borrow more money.
While it was able to reduce its annual debt service, the Warner Music Group took on a new obligation as part of the debt refinancing. For its term loan, it has agreed to make annual principal payments of 5% annually on its $600 million term loan, which comes out to $30 million annually. Those payments, which must be made in quarterly installments, means that by the time the loan matures, WMG will have paid off about $120 million, which means it will have a balloon payment of about $480 million, when the debt comes due.
It also means that while annual interest payments are reduced, that reduction is almost 75% offset by principal payments, which means in terms of cash outlay the reduction comes to about $13 million annually, but with each principle payment, the company's balance sheet improves.
In yet another refinancing move, WMG negotiated a new secured $150 million revolving credit facility. This facility replaces a $60 million revolver, which was never drawn down upon.
The new revolver also has no financial covenants attached to it, but for a springing leverage ratio, which is only tested when the outstanding amount drawn down is $30 million or greater.
Credit Suisse, Barclays, UBS Investment Bank, Macquarie Capital and Nomura were the banks involved in the term loan, the dollar denominated notes and the new revolver and for the Euro denominated notes they were joined by Wells Fargo.