KKR turns to banks for Cotiviti underwrite amid repricing wave

David Brooke
+Will Caiger-Smith

11 January 2024•3 min read

KKR is leaning towards banks to provide the financing for its proposed acquisition of a 50% stake in Cotiviti, partly thanks to a favorable climate for primary leveraged loan issuance which has helped recent deals price tighter, according to 9fin sources.

The private equity firm has run a dual track process, taking proposals from banks and direct lenders to provide roughly $5bn of debt to fund the deal. The sponsor recently asked its potential financing partners to refresh their pricing proposals in light of strong markets, sources said.

Banks are understood to be offering pricing in the region of SOFR+325bps-375bps, which is at least 100bps cheaper than the private credit offering.

JP Morgan, which is the agent on Cotiviti’s existing term loan, is among the multiple banks fighting hard to win the financing mandate, as 9fin has previously reported.

KKR asked private credit firms to underwrite the deal at S+475bps with a payment-in-kind (PIK) feature, according to 9fin sources. Direct lenders have higher return hurdles than investment banks, and often prefer not to go below S+500bps.

A recent rally in credit — particularly in the loan market, where multiple borrowers have repriced their debt to reduce their interest costs — has helped sponsors push for tighter pricing and given banks an advantage in the battle for some financing mandates.

Lost supply

If KKR does ultimately go with the bank proposal, it would be a blow to direct lenders — last spring, Carlyle was set to finance its proposed acquisition of Cotiviti in the private credit market before sale talks ultimately fell apart over a valuation mismatch.

Carlyle was looking to pay $12.5bn for its 50% stake in the company. KKR is offering $11bn to acquire a stake of the same size from Cotiviti’s current owner Veritas.

Direct lenders like Cotiviti, sources said, but their offering became less competitive. In December a dovish turn in sentiment at the Federal Reserve — which has signaled potential rate cuts this year — flipped the script just as news emerged of KKR’s bid for the company.

The 10-year fell below 4% in December, prompting a spree of repricings in the leveraged loan market as banks were able to offer tighter pricing to borrowers. Prior to that, private credit firms were pitching pricing of S+550bps plus a PIK component.

Blackstone, Blue Owl, Ares, and HPS were in the hunt for the financing, as we have previously reported.

If the financing did go to direct lenders, it would be among the largest private credit financings on record — although not quite as large as one of 2023’s biggest deals.

Last year, Vista Equity Partners was able to complete a total $5.3bn financing for Finastra. The loan package was led by Oak Hill Advisors, and enabled the company to push out a looming maturity on its existing debt.

KKR declined to comment. Cotiviti did not respond to a request for comment.