Taking the Credit — Dividend recaps and plugging the gaps

Josie Shillito

3 August 2023•3 min read

Some intriguing developments in private credit this week, although not all of them could be called strictly private credit in the plain vanilla sense of the word. First, a dividend recap. It sounds a little anachronistic, no? Dividend recaps were a way for sponsors to lump more debt onto the portfolio company in order to extract a payout to shareholders, and made sense at a time when debt was cheap. But when base rates in Europe and the UK have been raised again?

Nonetheless, Blackstone is raising a €600m TLB, adding a €200m delayed draw facility, and increasing the existing RCF by €50m, in part to fund a dividend recap on Dutch solar mounting solutions provider Esdec Solar Group. Although on more of an infrastructure asset than a plain vanilla corporate private debt transaction, it’s punchy to do the recap so soon after the original investment (December 2022).

“In our view, this transaction signals an aggressive financial policy, given the substantial increase in S&P Global Ratings-adjusted leverage to 5.4x pro forma based on last-12-month (LTM) EBITDA for the period ending March 31, 2023, from 2.9x in 2022, which will reduce rating headroom to our 6.0x downside trigger. Credit metrics could quickly deteriorate if Esdec is unable to preserve its profitability and competitive position in the solar panel market,” ratings agency S&P said of the proposed transaction.

However market sources believe that it’s becoming more frequent for new private credit funds to enter existing debt packages through reverse enquiry — and this kind of activity may also provide the cheaper debt needed for a divi recap.

“We’re all on our guard,” said a private credit fund manager. “With the price of debt up, but leverage going down, other private credit funds are approaching our sponsors and offering the same debt, at cheaper levels.”

Most often, this approach is situation-specific. A common approach is if the company in question needs some kind of transformational capital, for example, to unlock debt for acquisition facilities that are already full.

The private credit manager in question noted at least one approach of this nature concerning debt that they were in. “There’s cheaper debt out there,” they shrugged.

Blackstone declined to comment.

Fundraising surprisingly healthy

At a time when Preqin is reporting rebounding private debt fundraising volumes in the past quarter (European managers increasing fundraising volumes seven-fold quarter-on-quarter), 9fin reports that Eurazeo has closed its 6th fund at €2.3b-2.6bn in size and is raising for its 7th at €3bn. It is also worth noting that Ares continues to fundraise for its European Direct Lending Fund VI, according to SEC filings, having reached first close in May, as reported by 9fin.

Nonetheless, these are still well-known names. Fundraising still remains slow for private credit funds who are not necessarily established players.

Bumper crop of deals and last take private?

Another week, another take private, with Barings financing its second P2P of the year — UK-listed tech firm Blancco. The direct lender will provide £118.5m of funds, split across a £85m unitranche facility, £25m capex and acquisition (CAR) facility, and an £8.5m revolving bridge facility.

Happily, the term sheet was made fully public.

Two large US private debt deals have come in before August gets into full swing: Kohlberg & Company has inked a deal to acquire pharmaceutical research provider Worldwide Clinical Trials at a roughly $2bn valuation, with debt financing from a group of direct lenders led by Blue Owl.

And, Blue Owl is also leading the financing for TPG and Francisco Partners’ acquisition of New Relic, which comprises a term loan in excess of $2bn in size. The deal is structured as an ARR loan, and the financing package includes a revolving credit facility.

There will be no Taking the Credit next week. See you in a fortnight!