While the terms of the loan are still in flux (closing is expected next month, although that timeline could change) lenders appear to have won an important concession in the form of a cap on EBITDA adjustments, according to two sources close to the situation.

The provision would impose an aggregate limit on add-backs for the likes of synergies and restructuring costs set at roughly 35%, according to one of the sources, who noted that discussions were ongoing and the exact level could change.

Caps like this have been uncommon in jumbo unitranche deals past, sources noted. As such, its inclusion in the Cotiviti deal suggests that private credit firms are becoming more discerning as the economy increasingly seems to be approaching uncharted territory for the asset class: a recessionary environment.

“In the large-cap deals you would never see restructuring costs capped, and you certainly would never see an aggregate cap for synergies,” said one of the sources. “Even in $100m deals, you wouldn’t see caps on restructuring costs and add-backs. So that’s a new development.”

The proposed loan will lever Cotiviti approximately 6.75x, based on roughly $815m of pro forma adjusted EBITDA, the sources said.

Tighten up

The inclusion of the cap on add-backs — especially given that this financing was a competitive process, and that Cotiviti is a well-regarded credit — could portend a general tightening of lending standards in private credit, sources told 9fin.

Of course, the proposed loan also made headlines recently for including a borrower-friendly feature not generally seen in unitranches of this size. The pricing structure has a generous PIK coupon, which will enable Cotiviti to preserve cash if it chooses.

Still, lenders are becoming more discerning over loose documentation in light of heightened economic uncertainty and rising interest rates, and the recent lull in the syndicated market may also be giving private credit firms more leverage to push back.

Funds also may be able to extract concessions in some parts of the credit agreement, even while offering more aggressive terms in others, said Dan Pietrzak, co-head of KKR’s private credit business, in a recent video interview with 9fin.

“I don’t think the private credit lenders in any deal these days are trying to lean in to being more aggressive,” he said.

A-listers

Cotiviti’s loan has drawn interest from most of the major players in private credit. Investment banks also pitched hard for a syndicated debt mandate; some, like JP Morgan, hedged their bets and played both sides.

The current lender group features around a dozen lenders, including Owl Rock, Apollo, KKR, HPS, Neuberger Berman, JP Morgan, Blackstone, Sixth Street and Ares, sources said. Some of these firms may have been involved in Cotiviti’s legacy debt, one of the sources noted.

Although Cotiviti is seen as an attractive credit, not every lender that was shown the deal ultimately chose to play. Meanwhile, some others wanted to but couldn’t break into the group.

One investment bank with a direct lending group told us they decided to pass on the deal; and a source at large middle-market lending firm said they tried to get an allocation but were unable to “because it’s a pretty high-quality credit with a following.”

JP Morgan, KKR, HPS, Blackstone, Ares and Owl Rock declined to comment. Representatives for Cotiviti, Apollo, Neuberger Berman, and Sixth Street did not respond to requests for comment.