It’s been a tough couple of years for Pactera Technology International. The tech outsourcing arm of embattled Chinese conglomerate HNA Group Co has been ditched by Bank of America Corp and Goldman Sachs Group Inc, sued over a collapsed acquisition and cut deep into junk territory by Moody’s Investors Service.
Now it turns out that a rare piece of seemingly good news last month – an $80mn loan secured by Pactera after more than a year of failed attempts to attract funding – may just be another sign of the fragile financial state of the company and its debt-laden parent.
The loan came from Davidson Kempner Capital Management, a US hedge fund whose specialties including distressed investing, people with knowledge of the matter said. While terms of the deal weren’t disclosed, analysts suspect Pactera had to pay up to attract Davidson Kempner, which had $31bn of assets under management in January.
“The fact that they’re borrowing money from a hedge fund, I think it’s a sign that they aren’t able to resolve their issues,” said Jin Rui Oh, a Singapore-based senior analyst at United First Partners. “It’s an open secret that they are in a really bad position.”
Pactera’s difficulties, some of which haven’t been previously reported, illustrate how HNA is still struggling to cope with the debt burden amassed during a $40bn takeover spree. While the conglomerate has been shedding assets this year to reduce leverage, it no longer has access to cheap financing after some international banks distanced themselves from the group and China cracked down on the shadow lending system that helped fund HNA’s expansion.
Representatives for HNA and Davidson Kempner declined to comment.
HNA’s ownership of Pactera dates back to 2016, when it agreed to buy the company from Blackstone Group LP for about $700mn. It didn’t take long for Pactera’s relationship with Wall Street to turn rocky.
In mid-2017, the company began working with Bank of America to seek funding for a planned acquisition, a person with knowledge of the matter said. The plan fell apart when Bank of America told its investment bankers to stop working on HNA deals amid concerns about the conglomerate’s debt and ownership. Pactera ended up dropping the acquisition, another person said.
Pactera’s other attempts to raise financing didn’t fare much better. It was working with Goldman Sachs on preparations for an initial public offering, but the bank later dropped off because the deal didn’t meet internal compliance requirements, Bloomberg News reported in September 2017.
The company then turned to CLSA, asking it to help sell as much as $300mn of convertible preference shares, people with knowledge of the matter said. Pactera parted ways with its CFO in June, without explaining why. The deal has since been shelved, though Pactera is still working on other funding options, one person said.
Representatives for Bank of America and CLSA declined to comment.
Pressure on Pactera escalated in July after Moody’s cut the company’s credit rating by one notch to Caa1, saying it didn’t have enough cash to cover capital expenditures and short-term borrowings. Pactera’s profitability has suffered from rising labour costs, staff attrition and a lack of scale compared with global rivals, Moody’s wrote in a July 18 report.
News that Pactera had finally locked down financing came in an October 1 regulatory filing. The company said it obtained a twelve-month secured term facility of $80mn from Adare Finance DAC, but didn’t provide details about Adare’s background. The entity is controlled by Davidson Kempner, two people with knowledge of the matter said. The funding should be viewed as a positive development, according to Warut Promboon, Hong Kong-based managing partner at Bondcritic. An eventual Pactera IPO isn’t out of the question, assuming HNA makes progress with its broader restructuring, he said. Pactera’s holding company, HNA EcoTech Panorama Cayman Co, said last month that it’s focused on improving earnings.
Bond investors are sceptical. HNA EcoTech’s 2021 dollar notes have slumped this year, lifting their yield to about 11% from 6% in January.
HNA is unlikely to provide additional support to Pactera even if the company faces financial distress, S&P Global Ratings said in a February report. Cher Chen, an analyst at the rating agency, sees the loan from Davidson Kempner as a short-term fix.
The HNA Group headquarters building stands in Haikou, China. Pactera Technology, the tech outsourcing arm of HNA, has secured $80mn loan from Davidson Kempner Capital Management, a US hedge fund.
