As they push for a lucrative business that was once dominated by Wall Street banks, private credit groups Apollo, Ares, and Blackstone are set to make the largest direct loans ever written.
Five people briefed on this transaction said that the lenders seem more confident than investment banks like JPMorgan or Goldman Sachs in a deal to finance Carlyle’s purchase of a 50% stake in Cotiviti’s healthcare analytics company.
The loan of $5.5bn to buyout group Carlyle would help acquire the stake from rival Veritas Kapital. It could be announced within the next days or weeks, according to people. Cotiviti is valued at approximately $15 billion.
This highlights the increasing power of private creditors in the wake the global financial crisis. Banks were forced to meet stricter capital requirements, making it more difficult for them fund risky takeovers.
This trend has only increased in recent months, after banks were left struggling to sell off the debt they had provided to finance large takeovers such as Elon Musk’s purchase of Twitter.
Kipp deVeer from Ares, who heads credit, stated that “large deals are no longer just the provenance banks.”
According to private capital industry executives, the financing package for Cotiviti would include a $1bn preferred share investment. This is just one of many large private loans currently being discussed.
The potential deals are much larger than they were a few years ago when private loans were high at $1bn-$2bn.
DeVeer stated, “Folks are made of dry powder.” “People will buy from a high-quality company if they can get a good deal. . . You will need to have the capital and the ability to do this.
Private credit funds have raised a lot of capital, many of which were started as pure-play buyouts.
Over the past three year, there has been an influx in retail investors into Blackstone’s private-credit investment fund, called Bcred. This has helped private capital groups to write larger checks. Even though there has been a lot of outflows recently, institutional investors are still committed to the market.
Howard Marks, Oaktree Capital’s co-founder, told clients last week that the company was seeking $10bn in order to finance loans for large buyouts. A few days before, Ares chief executive Michael Arougheti declared that the firm would embark on “a very significant fundraising push”.
Non-bank lenders are attracted to the high returns offered by loans that yield 6 to 7 percentage points above the floating rate benchmark. This is roughly 11% or 12 percent in total. If the Federal Reserve and other central bankers continue to push for higher interest rates, this number will increase even more.
“It has evolved to a consistent financial instrument for borrowers, and it has gone increasingly upmarket,” stated Dan Pietrzak (co-head of private credits at KKR). “The market can do multibillion-dollar deals,” he said.
Because the market for third-party investors to offload debt has dried up, banks have not been able to stop the loss of this lucrative business to private credit competitors.
Barclays and Bank of America have had to keep loans to finance large buyouts such as the Twitter deal or the takeover of Citrix. This has left them with huge losses.
Alex Popov, Carlyle’s head of illiquid credits, stated that “2022 really shut down capital markets. This was the most severe dislocation in terms of capital markets, with no underwriters available for new transactions.
Even after the recovery of high-yield bonds and leveraged loans markets, private credit is still one of the few capital sources available in times of tighter financial conditions.
Data from PitchBook LCD reveals that the vast majority syndicated loans market deals — where banks underwrite debt and then sell slices to investors — were done to refinance existing borrowings, not to fund takeovers.
According to bankers, the trend could change if markets become more volatile. “A lot of underwriters remain on the sidelines, so it is difficult to get syndicated deals underwritten at scale. However,. . . People will return,” Rob Fullerton, global head for leveraged finance at Jefferies, said.
According to people familiar with the transaction, there was strong demand for the Cotiviti Loan. There were also several other groups interested in the deal, such as HPS Investment and Ares.
According to people briefed, Carlyle managed to lower the yield on the loan by 6.25 percentage points relative to the Sofr benchmark rate. This is in contrast to the 6.5 percentage point that was previously discussed.
Private capital groups are looking for a sweetener to allow Cotiviti pay the interest on the loan through more debt. This is why Carlyle chose the funding package over the one being offered by JPMorgan or Goldman Sachs.
Discussions about the so-called payment in kind provision are still in an early stage. They may not go through. Two people stated that it would enable Cotiviti cash to be preserved in times of recession.