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This article is part of our new service, 9fin Private Credit, which will soon require a separate subscription to view. For more info on this product and the accompanying database, contact subscriptions@9fin.com.

A blistering rally in credit assets in recent weeks has given investment banks a significant advantage over private credit firms in the battle to finance KKR’s acquisition of healthcare technology firm Cotiviti, according to 9fin sources.

The Federal Reserve this week signaled that it would cut rates next year, pushing the 10-year below 4% and pouring gasoline on an already smoldering rally in credit, which has led multiple leveraged loan issuers to reprice their debt lower in recent weeks.

This has helped investment banks pitch cheaper financing proposals to KKR and Cotiviti compared with private credit funds, according to sources. 

Banks and direct lenders are competing to provide around $5bn of debt to back the deal, accounting for nearly half of the bid’s $11bn valuation. This is down from Carlyle’s $12.5bn bid for the company, which fell apart in April this year.

The most aggressive packages from banks are offering potential pricing below 400bps over SOFR and even approaching the mid-300bps area, said sources. 

For context, Cotiviti’s existing term loan was issued in 2021 with a coupon of Libor+450bps. As agent on the loan, JP Morgan is in a good position to lead the deal, but other bulge-bracket investment banks are competing hard, sources said. 

On the private credit side, firms including Blackstone, Blue Owl, Ares and HPS have offered pricing in the region of SOFR+550bps. The private credit packages are said to be considering a large PIK component, and could potentially offer a larger overall amount of debt to compete with the banks, sources said.

Banks have to provide a pricing range when underwriting leveraged loans, known as flex, to account for moves in the market between when they agree to provide financing and when they offload the debt to institutional investors. 

However, private credit firms are more limited than banks in how far they can reduce their pricing, sources noted. Some direct lenders have proposed pricing as low as 475bps over SOFR, but others are not willing to go that low, sources said. 

Earlier in 2023, the LevFin markets were rife with uncertainty and banks were less willing to take risk on new underwrites. In that context, private credit firms were able to scoop up a lot of deals and keep pricing largely above the 600bps mark. 

In recent months, however, that has reversed, as sponsors regain the upper hand in negotiations and banks become a bigger presence in the market. In a column last month, we noted the significance of the 600bps mark being breached. 

While they are trying to remain competitive in terms of pricing, the private credit proposals for KKR and Cotiviti still remain a lot more expensive overall. As we noted in another article last week, private credit deals are still often 100bps-300bps wider than syndicated loans. 

An extra hurdle for the banks battling to win the mandate is the execution risk of offloading the debt to institutional investors in the event the market turns, as it did for 2022’s vintage of hung LBOs.

However, the recent ramp-up in CLO issuance is a positive sign. CLO managers buy the majority of syndicated leveraged loans, and newly priced CLO vehicles are under pressure to put money to work. 

As such, a syndicated Cotiviti deal would likely be met with strong demand from institutional investors, sources noted. 

Blue Owl declined to comment. JP Morgan, Ares, KKR, HPS, Blackstone, and Cotiviti did not provide comment by the time of publication.

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