Summer fling

Perhaps the summer lull is a relic of the past. The July 4th holiday is merely a nice reprieve; whatever weeks we take off with family are an interruption of the ongoing deal flow in private credit. Pipelines (while they are not robust) are filling up for the third and fourth quarter.

What Homer Simpson once said may be true of private credit managers today: “When you get a job like me, you’ll miss every summer.”

Over the last week 9fin has reported on some of the activity behind the curtain. Most notable is New Relic, which obtained a $2bn-plus loan, led by Blue Owl in support of Francisco Partners’ and TPG’s buyout. 

It has the markings of a loan that is emblematic of private credit. A take-private and a software company — which we have documented direct lenders have a penchant for. 

And it is of a size that private credit firms have been chasing as they raise larger and larger funds and therefore do bigger deals to put the cash to work efficiently. Of course, it’s an annual recurring revenue loan structure — perfect for private credit and not so much for the banks (and a number of other private credit lenders that tend to stay away from unprofitable middle market companies).

Take-privates are popular because that is where the bargains are: equity markets are still down from peak levels, notwithstanding the recent rally in the stock market. A report from Kirkland & Ellis found that many firms that went public in 2020 and 2021 are performing below their stock price, making them perfect candidates for acquisitions.

Magic number

Large billion-dollar unitranches remain on the radar — jumbo unitranche or megatranche, depending on your preference — as dry powder remains at a sizeable level (approximately 28% of what Preqin reports of the $1.5trn global AUM of the private credit market, which we talked about in a previous issue of the Unicrunch).

Not so long ago, 9fin reported on Baxter International’s spin out of its biopharma solutions business, which was funded with a $1.9bn private credit facility. Ares, HPS and Blue Owl led the financing for Warburg Pincus and Advent’s joint takeover of the company.

Perhaps the megatranche is seldom seen (of course because it’s a private market that can be difficult to say with confidence). Though the Finastra deal rolls on. As the company struggles to pull together a total $6bn private credit package, owner Vista is offering $1bn of preferred equity to support the refinancing, according to a Bloomberg report.

But sources say that private credit is truly ready to get that cash out there. Many funds retreated during the recent period of macro volatility, offering lower tickets to diversify their portfolios in preparation for a possible recession. Now, funds are looking to get back in the game as the economic outlook is more optimistic. Sources also say that the financing capabilities of private credit are so deep that a $10bn unitranche is doable. Sponsors, are you listening?

Health-scares

The healthcare sector has been tackling numerous headwinds, including inflated labor costs due to staff shortages and restrictive immigration policies; pressure on government spending as well as the difficulty retaining doctors in hospitals and keeping them from opening private practices.

That said, Apollo-backed hospital operator LifePoint Health indicated some of these pain points are easing, as it raised $800m in the high yield market earlier this week.

And private credit is now finding deals in the space. On Tuesday, 9fin reported that Worldwide Clinical Trials had obtained approximately $800m in total debt from direct lenders for a sponsor-to-sponsor buyout. Blue Owl led the deal and Antares was among the participants.

Of the deal, a private equity source told 9fin that it “looks like more evidence of private credit moving up in size to support PE LBO activity when the bank/bond markets aren’t there.” 

Kohlberg was the winning bidder, acquiring the company at a value of $2bn. Worldwide Clinical had been held by The Jordan Company since 2007. At a 18x multiple it is a “big price”, according to one private credit manager, who was not on the Kohlberg tree, but noted it was a “very nice business.”

One noteworthy thing is that it was a sponsor-to-sponsor transaction. For a while, such activity has been stymied by parties struggling to agree a price, as well as the high cost of debt. As a second private credit manager said to 9fin “the cost of capital means deals are hard to do. And there is a valuation gap that sellers are not willing to accept.” For instance the collapse of the $5.5bn Cotiviti deal was due to questions over the equity valuation.

Despite this dynamic, sponsor-to-sponsor deals are happening. Last week 9fin reported on TPG’s purchase of Nextech from THL Partners for $1.4bn. Golub, an incumbent lender, partnered with Blue Owl and Blackstone Credit.

“Valuations will need to change for deals to really increase,” said the second private credit manager. “But we are seeing a pick-up in sponsor-to-sponsor activity.”

The Unicrunch is our US private credit newsletter, in which we break down everything from unitranches to ABL lending. Sign up here for the inside track on this fast-growing market.