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Last updated: November 27, 2012 11:54 pm
BATS Global Markets is looking to raise $300m of “junk”-rated debt to fund a payout to shareholders in its first attempt to tap investors since the exchange operator bungled its own public float in March.
The company, which runs the third-largest US stock-exchange by volume, is seeking to issue a $300m, six-year senior secured loan and open a $50m three-year revolving credit facility.
BATS met lenders in New York to discuss the transaction on Tuesday, people familiar with the negotiations said. Company officials declined to comment.
Standard & Poor’s and Moody’s assigned junk status to the BATS debt and revolver. The rationale for the rating provided a rare glimpse into the private company’s books, as no public disclosures have been given since the run-up to its botched initial public offering in March.
BATS had net revenues of $171m in the nine months to September 30, S&P reported, with more than three-quarters of sales coming from its US equity business. The company’s revenues were $127.9m for the full-year in 2011, according to securities filings placed ahead of the IPO.
BATS’ pre-tax operating margins were 26.5 per cent over the nine-month period, which compared with 18.8 per cent over the full year in 2011. S&P said the company’s profitability increased in part due to cost savings from its merger with Chi-X Europe, a European exchange operator it bought in February 2011.
Despite the gains, S&P said profitability at BATS compared poorly with most of the other exchanges that it rated. BATS had cash holdings of $50m and no outstanding debt as of September 30. Following the issuance, it would have a higher leverage ratio than other exchanges rated by S&P.
Dividend recapitalisations in periods of easy lending remain controversial as they increase companies’ debt leverage. Moody’s said one potential risk for creditors would be pressure from BATS investors, which include many of Wall Street’s biggest banks as well as high-frequency trading firm Getco.
“The strategic investors have driven an aggressive financial policy, as evidenced by the $300m debt-financed dividend,” said Moody’s.
The renewed fundraising effort comes after its failed $100m offering in March when a software bug disrupted initial trades in its stock on its opening day. The IPO was subsequently cancelled and investor funds were returned without losses.
Joe Ratterman, chief executive, was stripped of his title as chairman of the company soon after.
S&P issued a stable outlook for the company but said BATS, like other exchanges, was highly exposed to operational risks. “The stable outlook reflects our expectation that BATS will be able to maintain its market share and current operating performance.”
S&P added that it would be prepared to downgrade the company if its profitability and key credit metrics deteriorate.
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