Taking the Credit — Do as Dechra does?

Josie Shillito
+Jane Li

4 June 2023•6 min read

The £1.25bn-equivalent financing package behind sponsor EQT’s acquisition of UK-listed pharmaceuticals company Dechra is the latest example of deal terms being made public, as a series of take-private transactions lift the lid on the usually secretive world of private credit.

What is unusual about Dechra is that it’s a club deal - including several LPs. This raises two questions:

How does the UK Takeover Panel’s ‘rule of six’ apply if the financing parties alone outnumbers that limit?
How do you stop information from leaking when so many parties are involved?

Well, for point #2 it looks like you can’t: whispers about a Dechra take-private made it into the press weeks back. This could be the reason why the ‘rule of six’ became less relevant.

Historically, a take-private transaction is underwritten by the minimum of financing parties. Why? To keep the process as quiet as possible ahead of an offer announcement. Rumours and speculation about a prospective take private drive unnecessary volatility in the public stock.

It’s to minimise this volatility that the UK Takeover Panel imposes its ‘rule of six’ — that the offeror may speak to only six parties (including legal and accountancy) ahead of making its offer public.

Given the noise in the press regarding EQT’s bid for Dechra, it would seem that the rule of six became irrelevant and the number of private credit funds in the deal broadened.

But there’s no reason to think one of these funds couldn’t have spoken for the entire amount before bringing in other parties later. The firepower is there. Most of the funds listed in Dechra’s commitment letter could speak for tickets of well over £1bn.

The demand is also there. “Private debt lenders are better suited to finance public-to-privates than banks in current markets,” said a second market source. “Public-to-privates typically take longer to complete, and therefore require underwriting banks to take a longer period of market risk, which is more difficult to accept and price in current volatile markets.”

It is important to recognise that the Dechra commitment letter makes clear that “no commitment party shall act as an underwriter, arranger, trustee, agent or in a similar role in respect of the facilities.”

However, in the take privates seen so far (and please get in touch if I’m wrong), it’s been one or two private credit parties. But a deal of this scale and number better mimics in spirit if not in letter, the syndication process of old, where a bank would underwrite-to-distribute the debt component of a private credit deal.

Is this behaviour ringing any bells?

Blurred lines

Private credit has been snapping at the bottom (and the middle) of the syndicated space for some time, but it has emerged in the press that it’s now their key strategy to underwrite. Two weeks ago, we mentioned the hefty private debt players that seem determined to take chunks out of the syndicated market.

Since then, we’ve talked to two further funds whose very strategy now is to work with traditional underwriting banks to anchor new deals.

“What happens is that private credit funds usually interact with the syndicated market when the deals go badly, like hung deals, but what we’d like to do is build a business where we anchor those deals,” a private credit fund told 9fin.

A second, large private credit fund explained: “there is more of an option [now] for hybrid private credit transactions that ever before.”

What the source means by hybrid is to take down a material slice of the financing, giving banks enough confidence to come together and underwrite the rest.

For a recent example, look at Apollo’s participation in the Asda-EG Group deal. In the not-too-distant past, we also have the Envalior deal.

In both of these cases, private credit spoke for a portion of the debt. They played that critical role that underwriting banks once played in providing certainty of funds to the borrower.

“Our tranche gives banks enough confidence to come together and underwrite,” the second large private credit fund continued. “The opportunity to work with banks will only grow.”

Of course there are complications in using the take-and-hold model of private credit funds alongside the originate-to-distribute approach of the syndicated market. Not least in pricing the different components to reflect the illiquidity premium that private credit funds command.

However, reflecting differing costs of capital isn’t unknown in the syndicated markets. Any GBP tranche would usually command a higher premium. So, split the TLB into a private credit tranche and a syndicated tranche at different pricing? Possibly.

And what about document convergence? In recent times (2022), the documents of some large private credit deals very much reflected the syndicated markets in everything but name — cov-lite and all.

The question is, with private credit funds and underwriting banks working ever more closely is where the balance of power will lie: reflecting the comparatively tighter terms of private credit, with covenants and monthly reporting from the borrower, or stripping back to cov-lite.

Get in first, get in big

In general, these terms are dictated by the largest lender. “In clubs, we still like to be the largest lender and to drive the terms,” said the second private credit fund.

In Dechra, Blackstone holds £342m-equivalent across its funds, according to the sum of the figures available in the commitment letter, equating to over a quarter of the £1.25bn TLB.

According to 9fin sources, holding the role of biggest lender in a club like this is down not just to the sponsor relationship, but in a deal that normally would be broadly syndicated, to the relationship with the banks. Funds with CLOs with strong banking relationships will be at an advantage, but there are plenty of funds now actively cultivating these relationships.

“Working with private credit resonates with the smarter bank. They understand this. We [private credit] also are not concerned about our title in the deal, but about market share,” said the first large private credit fund.

One drawback for lenders is that participating in public to privates and in syndicated deals bring secret deal terms into the light — but there are workarounds to that.

Interim facilities have become increasingly common in recent times in private credit-backed public-to-private deals, as it means lenders are not forced to agree to (and publicise) long-term documentation within the pressured timetable of such transactions.

Direct lenders are quite incentivised to find workarounds like this, because in many ways they are the ideal financing partners for such deals.

Dechra’s lenders include Blackstone Credit, Goldman Sachs Asset Management, CVC Credit, US insurance company Delaware Life, KKR, Permira Credit, Norwegian pension fund KLP, insurer Resolution Life Australasia and two Canadian pension funds — CDPQ and PSP Investments.

The debt facilities include a £1.25bn-equivalent term loan split into a £625m-equivalent USD facility and a £625m-equivalent euro-denominated tranche, both paying SOFR/Euribor+625bps. The debt was offered with an OID of 97.5.

Alongside the term loan in the debt package is a £300m seven-year delayed draw senior term loan, with the same margin and OID.

A ratchet comes into play six months after the initial closing date: if the company’s leverage is greater than 5.3x, the margin is 625bps, ratcheting down to 600bps if leverage falls below 5.3x.

The deal was marketed off LTM EBITDA of £194.8m.

Dechra is also seeking a separate £194.8m multi-currency revolving facility on a super-senior basis. The club of lenders has agreed to assist the company in securing this financing from third parties.