Barring any major upsets (commitments are due by Thursday, and there appears to be decent interest) the deal could provide a ringing endorsement to the recent bounceback in broadly syndicated markets. 

Saved by the bell

Back in October, when the original Copeland financing package was underwritten, banks were saddled with hung debt and had little appetite for underwriting new deals. 

But investors have rediscovered their appetite in recent weeks, especially for highly-rated credits like Copeland, which is rated B1/BB-/BB at the corporate level (the TLB is Ba3/BB-/BB+). This puts Blackstone in a good position, because the Copeland acquisition has not yet closed.

Because none of the committed funds have been drawn from the private credit facility that backed the firm’s winning bid, it has not crystallized any upfront financial hit related to the OID. Clearly, the syndicated option is preferable even after factoring in any potential break fees. 

“If they had [drawn on the private credit facility] they would have a lot of sunk costs already in the capital structure, and the refinancing wouldn’t have been as opportunistic,” said a source close to the situation.

There may be additional debt to follow. A senior secured bond — likely carrying a three-year non-call structure — is also expected to hit the market in due course, sources told 9fin.

Blackstone originally agreed to finance its majority investment in the Copeland assets with $4.4bn of equity and $5.5bn of debt financing, according to a press release. Emerson also agreed to provide a $2.25bn PIK seller note to sweeten the deal.

Resurgent demand

While Copeland was one of several sponsor-backed deals that turned to private credit last year, sources said it’s doubtful there will be a broader wave of similar situations, where borrowers and sponsors look to the syndicated markets to refinance private debt.

“The quality and choices that we had when the syndicated market wasn't working at all were unbelievably good,” said one private debt investor. “But deals are going to have to go back to the syndicated market, because there's not enough private credit in the world to plug that hole.”

Some people might question that assertion! Several of our 9fin colleagues attended a private credit conference in Florida last week, where in addition to warning that regulation of private lenders would increase, panelists said they were poised to take on more big deals.

But putting aside that caveat, the Copeland situation is somewhat unique in that the deal hasn’t closed. Unless sponsors find themselves in a similar situation to Blackstone, refinancing in the syndicated markets might not be so attractive.

“Once you fund the deal, and you pay three or four or five points of OID, just to repay that back at par three months later is pretty costly,” said the source close to the Copeland deal.

Still, there is some expectation of more two-way traffic between public and private credit markets this year, as more sponsors and corporate issuers test appetite across both spaces.

Toy company Melissa & Doug, for example, ultimately opted for a private credit solution to an upcoming maturity after initially approaching the BSL market; ship repair company Titan, on the other hand, took the opposite approach to fund its buyout by Lone Star.

Staying cool

Aside from its attractive credit rating, sources said investors are also drawn to the deal by Copeland’s low leverage and its leading position in the HVAC component space, which one buysider described as “recession-resistant.”

That label gets thrown around a lot these days, but Copeland manufactures HVAC and refrigeration compressors for homeowners and businesses; these are crucial components for indispensable household appliances.

“Copeland ticks all of the boxes for what we think is a good quality credit,” said a buysider following the transaction. “Based on our internal rating system, this is one of the stronger recent deals in the primary.”

The deal is being marketed on leverage of around 4x, excluding the $2.25bn of PIK seller financing, two sources said. If you want more detail on the covenant package, you can request a copy of our Legals QuickTake for the loan here. 

“This deal looks really solid to me,” another buysider said. “We like the moderate leverage and Copeland is also a market leader. They’re number one in their market by a long shot.”

In a recent Moody’s report, the agency assigned the issuer a stable outlook. It cited expectations that Copeland will use free cash flow to repay debt and improve leverage over the next 18-24 months.

The agency also said it expects the company to maintain a strong liquidity position, estimating it will generate over $300m in cash in 2023 and maintain “ample” capacity on a $700m undrawn ABL revolver.

Copeland and Blackstone declined to comment. RBC did not return a request for comment.