Hacker-For-Hire Accused Of Aiding Saudis Is Worrying Wall Street

It helped Mexico track down El Chapo, but it's also been accused of assisting Saudi Arabia spy on dissidents.

Now NSO Group, hackers-for-hire likened to a private intelligence service, has become a strain for two Wall Street banks that helped fund a buyout of the Israel-based company last month. After struggling to find buyers for a $500 million loan that they agreed to provide, Jefferies Financial Group Inc. and Credit Suisse Group AG had to come up with the cash themselves and are now unloading the debt at a steep discount, according to people with knowledge of the matter.

The banks were left holding the loan after increased public scrutiny of NSO's most high-profile product: a smartphone-hacking tool known as Pegasus that has helped make the company hundreds of millions of dollars from licensing it to foreign governments and intelligence agencies. In recent weeks, NSO has sought to rebut accusations that Pegasus has been used by countries to spy on dissidents, including from one Saudi citizen who claims the software allowed the kingdom to monitor his communications with murdered journalist Jamal Khashoggi.

"We didn't get past the initial analysis stages due to our ESG requirements," said Azhar Hussain, head of global high yield for Royal London Asset Management Ltd., referring to environmental, social and governance criteria used to screen potential investments. "It wouldn't be an optimal credit selection for our portfolio considering the negative press and the nature of what the company does."

In the end, the banks appear to have found enough investors to push the deal through at one of the steepest discounts for the loan market in years.

After canvasing potential buyers for a month, Jefferies made a number of investor-friendly changes to the loan's structure, including cutting the price to 90 cents on the dollar, down from initial talk of 98 cents. The loan is expected to be allocated on Tuesday. Some firms that manage collateralized loan obligations and have scooped up the company's debt in the past are among those looking at the new deal, said the people, who asked not to be identified because the discussions are private.

Yet steep discounts typically eat into the fees banks earn for arranging financings, and can even result in outright losses depending on the terms agreed with the borrower.

Jefferies and Credit Suisse declined to comment.

The buyout follows high-profile allegations that some of NSO's clients have used its sophisticated spyware to target political opponents. In the weeks since the acquisition was announced, NSO and its practices have come under scrutiny from Amnesty International and Human Rights Watch, and have been thrown into the spotlight by the New York Times and CBS' "60 Minutes" news magazine.

In December, Omar Abdulaziz, an online critic of Saudi Arabia who lives in Canada, filed a lawsuit against NSO in Israel claiming the company's software enabled the kingdom to hack his phone and track his communications with Khashoggi. Those communications, according to the lawsuit, contributed to the decision to kill Khashoggi.

"Abdulaziz's suit makes a number of false claims," an NSO spokeswoman said via email. "NSO technology has helped stop vicious crimes and deadly terrorist attacks around the world," she said, adding that "if we determine there is a risk for our technology being used for anything other than the prevention or investigation of terrorism and crime, we do not license it. If we find or suspect misuse, we retain the right to shut down the system."

NSO co-founder and CEO Shalev Hulio has said that the firm's technology was not used on Khashoggi or his relatives, and that the company has identified only three cases of misuse in its history.

Founded in 2010, NSO sells its products exclusively to government intelligence and law enforcement agencies, according to its website. The firm's software is used by countries including Mexico and Brazil, and NSO says it supports the national security priorities of Israel, the U.S. and Europe.

Pegasus - said to be capable of spiriting data from just about any smartphone - is such a powerful tool that it's licensed to foreign governments only with the approval of Israel's Ministry of Defense, similar to an arms deal.

A representative for the Defense Ministry couldn't be reached during a public holiday Tuesday in Israel.

The company was bought by private equity firm Francisco Partners in 2014. It has about 600 employees operating primarily out of Israel, Bulgaria and Cyprus, and has more than 60 customers in over 35 countries, according to Moody's Investors Service. In 2018, NSO reported revenues of $251 million.

Novalpina Capital, a European private equity firm founded in 2017 by three former TPG Capital executives, acquired a majority stake in NSO as part of the buyout, which valued the company at about $1 billion, said the people familiar. Novalpina closed its first fund last month with total commitments in excess of 1 billion euros.

"NSO is committed to a rigorous ethical business framework that relies on the expertise of people with relevant backgrounds to evaluate potential customers and review current customers," a Novalpina spokesman said in an emailed response to questions. "While use of this technology is on a small highly-targeted scale, it has saved thousands of lives."

Yet European investors have been particularly wary of getting involved in the company given ethical concerns, with some firms not even bothering to examine the pricing, according to lenders who looked at the transaction. Other investors who studied the deal have expressed concern that NSO's technology is prone to disruption, and participants would be left with few real assets in a recovery scenario.

The tepid response stands in contrast to the success of a debut global bond sale that kicked off Monday from Saudi Arabia's state-owned oil company, Saudi Aramco. Investors - who briefly steered clear of anything linked to the Saudi regime last year following Khashoggi's killing - had placed orders for about $75 billion, more than five times the expected size of the sale, people familiar with the deal said.

Interest in NSO has been stronger stateside, according to the people with knowledge of that offering, given the company's already established track record tapping U.S. capital markets.

Chunks of a $250 million loan issued by an NSO entity in 2017 have ended up in collateralized loan obligations managed by firms including Ellington Management Group, MJX Asset Management and Marathon Asset Management, according to data compiled by Bloomberg. CLOs are vehicles that buy hundreds of loans and sell them as bonds to investors based on their risk profiles.

Should the deal ultimately price at 90 cents as anticipated, it will be the steepest discount on a dollar-denominated loan of similar seniority since December 2016, according to data compiled by Bloomberg.

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Bloomberg's Laura Benitez, Sally Bakewell, Jeannine Amodeo, Lara Wieczezynski, Ruth McGavin and Yaacov Benmeleh contributed to this report.