(Bloomberg) — Finding steep competition from the broadly syndicated market, private credit firms are offering one benefit to potential borrowers: leverage.
Direct lenders are pitching higher leverage ratios as a sweetener for deals, particularly for companies owned by private equity firms. Tacking on more debt gives companies flexibility to make acquisitions, and can fund a dividend payout to shareholders, also known as a dividend recapitalization.
“We are seeing fierce competition for the highest quality assets, and with that, the illiquidity premium is shrinking,” said Matt Harvey, the head of direct lending at PGIM Private Capital. “Leverage is also stretching, in addition to terms, but we aren’t observing a blatant abuse of credit underwriting standards.”
Facing a hot broadly syndicated market, private credit lenders have been focused on finding ways to entice borrowers. With many firms unable to compromise on tighter pricing, offering more leverage can be a draw. Ways to add more leverage can also include accepting heavily adjusted earnings metrics or providing delayed draw term loans.
For some companies, private credit has pushed their leverage to over six times earnings, according to people with knowledge of the matter, a level viewed as relatively high by Wall Street standards. Deals for companies within some industries, such as software or business services, have tacked on leverage more than eight times earnings, said the people, who asked not to be identified discussing private information.
Private lenders are looking to provide around $3 billion of financing for Flexera Software to pay a dividend to its private equity owner Thoma Bravo. The debt package would add almost $1 billion to its current $1.9 billion capital structure, according to data compiled by Bloomberg.
“Private credit managers appear eager to deploy and they’re pulling the levers they can to do so,” said Matt Freund, president of Barings BDC, a business development company that focuses on middle-market lending.
Private credit can offer more flexibility than a syndicated transaction and some large cap managers are offering features including large delayed draw commitments or payment-in-kind options to compete against such financings, according to Freund. Delayed draw term loans give borrowers access to the full amount at deal close, with the option to borrow at a later date.
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In a muted market for mergers and acquisitions, assets that have sold are typically higher quality, according to market participants. Sponsors, desperate for deals, have generally been willing to pay out large multiples to win the names they like.
For Thoma Bravo’s acquisition of navigation unit Jeppesen, Apollo Global Management Inc., Blackstone Inc. and others provided a $4 billion loan, boosting Jeppesen’s leverage ratio to between eight and 10 times earnings, according to people with knowledge of the matter.
Representatives for Thoma Bravo and Apollo didn’t immediately provide a comment.
High acquisition prices means that loan-to-value ratios for deals can be around 30% to 40%, less than typical ratios of around 60%, making lenders more comfortable pushing leverage ratios. The Jeppesen deal had a loan-to-value ratio of around 35%, they said.
“Highly levered deals typically have lower loan-to-value,” said Brad Marshall, the global head of private credit strategies at Blackstone. “These deals may be highly levered on a last-twelve-months cash flow basis which is backward looking, but they tend to be faster-growing businesses and therefore can de-lever more quickly.”
Private credit underwriters generally expect leverage to eventually be brought down as the company continues to grow. However, increased leverage levels always pose risk, with the potential to hamper future growth activity or cause a cash crunch.
Around 45% of companies financed by private debt are in danger of breaching their leverage cap, which is based on interest coverage ratio of two times, a measure of earnings compared to interest payments, according to a report from MSCI. That marks an almost three-fold increase compared to buyout vintages from 2010 to 2019.
“Buyout holdings may be caught in a leverage squeeze, potentially limiting the capacity for dividend recapitalizations and curbing incremental borrowing that would pull growth levers” such as capital expenditure and bolt-on acquisitions, according to the MSCI report.
Deals
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Sixth Street Partners is leading a $280 million financing package for Flexitallic Group, a sealing solutions company for the energy sector
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Deutsche Bank AG and SeaTown Holdings International are among the lenders providing a $510 million private credit loan to VinFast Auto Ltd.
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Carlyle Group Inc. provided a $400 million financing package to support TPG Inc.’s recent acquisition of travel technology company Sabre Corp.’s Hospitality Solutions unit
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Vincom Retail JSC, a unit of Vietnamese conglomerate Vingroup JSC, has received commitments for its $240 million private credit loan
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Carlyle Group is in talks to hand over the keys to Dainese SpA to creditors HPS Investment Partners and Arcmont Asset Management, in one of the first potential private credit takeovers in Italy
Fundraising
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Tali Ventures, the venture capital arm of Stc Group, has taken a minority stake in Tarmeez Capital, a Saudi debt investment platform that aims to raise 1 billion riyals for its first private credit fund within two years
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Saudi Awwal Bank’s investment arm plans to raise as much as one billion riyals for its first private credit fund focused on the Middle East and North Africa
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Private market secondaries manager Coller Capital has raised $6.8 billion for its credit platform Coller Credit Opportunities II Fund
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Aditya Birla Sun Life AMC’s ABSL Structured Opportunities Fund Series II completed its first close raising 7 billion rupees in commitments for its first private debt fund
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Blue Owl Capital, Koda Capital launch an Australian unit trust that invests in Blue Owl Credit Income Corp., which provides floating-rate loans to US middle and upper middle-market companies
This story was produced with the assistance of Bloomberg Automation.
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