Federated Investors Borrows $425M - Analyst Blog

On Monday, Federated Investors Inc. (FII) announced that it has got into a new term-loan agreement worth $425 million for five years, thereby revising its existing $140 million term-loan agreement.

 

The principal amount of the new term loan will be paid on a quarterly basis, with $10.6 million per quarter for the first four years and $63.8 million per quarter for the fifth year. The final payment will be due upon the expiry of the term loan on April 1, 2015. Interest will be charged at an annual fixed rate of 4.396%, while payments will be received by Federated on the basis of LIBOR rates.

 

Federated has appointed PNC Capital Markets LLC, a wing of PNC Financial Services Group Inc. (PNC), as its sole bookrunner while Citigroup Global Markets Inc., a division of Citigroup Inc. (C) as the joint lead manager for the consortium, which included 20 additional banks.

 

Federated also entered into an interest-rate swap facility with PNC Bank, whereby the initial estimated amount of new five-year term loan was set at $425 million. However, this will decline with the payments that are expected to be made every quarter.

 

Federated expects to utilize the proceeds of the new term loan to repay its existing debts and also for general corporate purposes. The disruptions in the financial markets over the past two years have caused severe dislocations on the functioning of the markets and an unprecedented strain on the availability of liquidity in short term debt markets, including commercial paper markets, which are important for the operation of prime money market funds. These factors along with the company’s wide exposure in the money market have worsened its financials as well.

 

Concurrently, Federated has also extended the contract with Citigroup to get its separately managed accounts (SMA) checked by the two products of Citigroup. These are the Open(SM)Asm and CitiConnect, which Federated has been using since 2006 to support one of its subsidiaries, Clover Investment Advisors. However, terms of the contract remain undisclosed.

 

Given the large money market fund operation, Federated's business mix is offset by the exceptionally low interest rate environment and the challenges in charging its full management fee. Although near term headwinds are expected in the form of weak liquidity, higher compensation and elevated operating expenses, we believe the company has the potential to deliver strong leverage once the markets revive in the long run.

 

On Monday, the shares of Federated closed at $26.36, down 0.5%, at the New York Stock Exchange.