Taking the Credit — Private debt with heft

Josie Shillito

18 May 2023•4 min read

We’ve written a fair bit on private credit fund participation in public-to-private deals, but it’s worth revisiting how private credit funds in larger deals are going to work with banks more generally. We’ve all seen them snapping at the bottom of the syndicated markets, taking down hung deals, or even conducting a hybrid private credit / private placement transaction.

Now, with this week’s announcement that sponsor TG Capital is acquiring credit player Angelo Gordon, as well as the first close of Ares’ European Direct Lending Fund VI (planning to exceed €11bn in size), we’re reminded of the value some see in creating private debt with heft.

“Senior direct lending for companies with an average EBITDA of $200m in the US, €130m in Europe is still very much a target,” a large credit fund told 9fin.

But what will they be doing with that scale? If it’s for the space previously occupied by syndicated markets, won’t this opportunity go away when the markets reopen? Well, no.

Junior debt opportunities

KKR wrote this week that the sweet spot in these large transactions is in the junior debt. They argue that few large syndicated LBO deals this year suggests that the market is only open for issuers with quite high ratings and very large equity cushions. The logic being, that this will create an opportunity for junior debt as it has a lower impact on issuer ratings than senior or secured debt.

“We believe acquirers will find themselves unable (or unwilling) to raise as much syndicated senior debt due to the current cost of debt rated mid-single-B or higher. We do not think greatly elevated equity checks are likely to become the norm, either. If we are right, this will leave large cap, high quality LBOs with a gap in their capital structures,” goes the KKR paper.

Interest cover ratios point in this direction too. 9fin wrote about a pretty serious decline in interest coverage (well below 2x). Again, the only logical way to keep the same interest cover ratio is by capping senior leverage on deals…and…the resurgence of subordinated debt?

Look at the proposed subordinated piece in Finastra, for example.

Hybrid syndications and placements

There remain huge opportunities for senior debt at a grander scale. Capital markets continue to be volatile, accelerating private credit participation in syndicated deals. A second large credit fund told 9fin it is making this area, and the sponsor relationships surrounding it, a strategic priority.

However, simply stepping into bank’s shoes isn’t on the cards. Instead, having a strong enough relationship with the sponsor to put in a private credit tranche that gives banks enough comfort to come together for the underwrite is the ultimate goal of the hybrid model.

“Could we speak for the whole debt? Of course. But we have fund concentration considerations to make,” said the first private credit fund.

In April, two private credit funds took a chunk of €2.42bn LBO debt for Envalior, placing the rest privately. A hybrid deal, where a term loan is given to a private credit fund and a term loan is syndicated, could be the future.

”You have one party, you have the certainty of funding, you have scale, you have certainty of funding and pricing,” said the credit fund. However, with one notable difference.

The ultimate goal is still to be the largest lender, and, through this position, to drive the terms. In the Envalior deal, the two anchor private credit funds were able to secure what the other deal participants believed to be superior pricing and terms to a plain-vanilla syndication.

“No one’s going into a unitranche arranged by banks then syndicating,” said the first private credit source. “What’s more interesting [with banks] is being the largest lender. Relationships with banks are therefore important. Large credit funds with CLO arms that are already plugged in are at the biggest advantage.”

Take privates take time

Meanwhile, Network International, which had received a non-binding proposal from funds managed by Brookfield Asset Management, but also, separately, from CVC and Francisco Partners, has now had the deadline for which Brookfield needs to make a binding offer, extended.

A little mysterious, but there are plenty of other P2Ps.

As summer holidays approach, it looks like holiday parks continue to be popular. Hayfin has stayed in European holiday park operator the Looping Group following its acquisition by PAI Partners - simply refinancing the debt - just as Ares chose to take on the entirety of ParkDean’s debt, returning the structure to a unitranche after a brief period only in the junior.