How will the $1.1 billion credit facility affect Priority Technology’s leverage ratio and balance sheet composition?

Short answer:

The $1.1 billion senior credit package will add roughly $1.1 billion of senior debt to Priority Technology’s balance sheet. In the short‑run the company’s leverage ratios (e.g., total‑debt‑to‑EBITDA, debt‑to‑equity, debt‑to‑capital) will rise because the denominator (debt) goes up while equity stays unchanged. Because the new facilities carry a lower interest rate than most of the company’s existing debt, the cost of that higher leverage will be lower – interest‑expense and the interest‑coverage ratio will improve, and the net‑impact on leverage will be mitigated if the proceeds are used to refinance higher‑cost debt or to fund growth that lifts EBITDA.

Below is a detailed, step‑by‑step analysis of how the $1.1 billion facility will affect the company’s leverage ratios and balance‑sheet composition.

1. What the transaction looks like on the balance sheet

• Assets: The cash inflow boosts current assets (cash, cash equivalents).
  
• Liabilities: The $1 bn term loan and $100 m revolving line are recorded as long‑term liabilities (the revolving portion is typically classified as a current liability for the amount that can be drawn within the next 12 months; any unused capacity stays off‑balance‑sheet until drawn).
  
• Equity: No immediate change, but subsequent use of the cash (e.g., repaying higher‑cost debt or investing in growth) may eventually affect retained earnings.

2. Impact on key leverage ratios

2.1. Debt‑to‑Equity (D/E)

[
\text{D/E (post‑transaction)} = \frac{\text{Existing Debt + $1.1 bn}}{\text{Equity}}
]

Because equity is unchanged, D/E will increase proportionally to the added debt. For example:

• If the company had $500 m of debt and $800 m of equity prior to the financing:

  • Pre‑transaction D/E = 0.625
    
  • Post‑transaction D/E = (500 m + 1,100 m) / 800 m = 2.00
    

Take‑away: The capital structure becomes more leveraged, but the absolute amount of equity remains the same, so the ratio goes up sharply.

2.2. Debt‑to‑Total‑Capital (D/TC)

[
\text{D/TC} = \frac{\text{Debt}}{\text{Debt + Equity}}
]

Adding $1.1 bn of debt raises the numerator and also raises total capital (since the cash inflow adds to assets). However, the denominator (Debt + Equity) grows only by the amount of new debt (the cash increase does not affect the denominator because equity is unchanged). The net effect is an increase in the proportion of capital that is debt‑financed.

2.3. Debt‑to‑EBITDA

[
\text{Debt‑to‑EBITDA} = \frac{\text{Total Debt (including new $1.1 bn)}}{\text{EBITDA}}
]

• If EBITDA stays constant, the ratio will rise by roughly (\frac{1.1\text{ bn}}{\text{Current EBITDA}}).
  
• If the proceeds are used to drive revenue and margin improvements (e.g., new product rollout, acquisitions, or higher‑margin lending services), EBITDA could rise, offsetting some of the leverage increase.

2.4. Interest‑Coverage Ratio (EBIT/Interest Expense)

Because the new facilities carry a lower interest rate than the company’s historical average borrowing cost, the annual interest expense will fall (if the funds replace higher‑rate debt). Consequently:

[
\text{Interest‑coverage} = \frac{\text{EBIT}}{\text{Interest Expense}}
]

Will improve even though total debt has risen, because the denominator (interest expense) falls. This partially mitigates the higher leverage and improves the company’s ability to service its debt.

3. How the Company Might Deploy the Cash

The news release cuts off after “will be used to re…”, but typical uses for a senior credit facility of this size are:

1. Refinancing existing debt – replace higher‑rate or maturing obligations with lower‑cost, longer‑dated senior debt.

   • Effect on leverage: If the old debt is retired, net debt may increase only marginally (or even fall if the new facility is used to pay down higher‑cost debt). Leverage ratios would improve relative to a pure “add‑only” scenario.

2. Funding growth initiatives (e.g., product development, market expansion, acquisitions).

   • Effect on leverage: Debt rises and EBITDA may rise over time, potentially bringing the debt‑to‑EBITDA ratio back down in future periods.

3. General corporate purposes / working‑capital (e.g., to fund the revolving portion for operational liquidity).

   • Effect on leverage: Immediate increase in leverage; longer‑term effect depends on whether the cash is used to generate incremental cash flow.

4. Net Effect on Leverage and Balance‑Sheet Composition

4.1. Short‑Term (immediate accounting impact)

4.2. Medium‑ to Long‑Term (if proceeds are used as expected)

5. Bottom‑Line Summary

1. Balance‑Sheet: The credit facility will add $1.1 bn of senior debt and a commensurate increase in cash. Total assets and total liabilities rise by the same amount; equity is unchanged. The revolving component adds a flexible, short‑term liquidity source.

2. Leverage Ratios:

   • Debt‑to‑Equity and Debt‑to‑Total‑Capital increase.
     
   • Debt‑to‑EBITDA rises unless the cash is used to generate enough additional earnings.
     
   • Interest‑Coverage improves because the new facilities carry a lower coupon.

3. Strategic Impact: By locking in a lower interest rate, the company reduces its cost of capital and can use the proceeds to refinance higher‑rate obligations, thus potentially offsetting the increase in absolute debt and improving overall financial health. The facility also gives Priority a substantial liquidity buffer that can be deployed toward growth opportunities, which—if successful—will ultimately offset the higher leverage.

Bottom line: In the immediate term, the $1.1 billion credit facility makes Priority Technology more leveraged on a balance‑sheet basis. The real risk‑adjusted impact depends on how the company deploys the cash; if used for refinancing and growth, the higher leverage can be offset by lower financing costs and improved earnings, leading to a healthier, more flexible capital structure over the longer term.