US LevFin Wrap — Baxter taps direct lenders, travel demand boosts Ryman, Arcis tees up expansion

Sasha Padbidri
+David Bell
+ 1 more

11 May 2023•4 min read

It has been a crazy couple of days, mostly because it’s suddenly 80 degrees in New York and we can’t wait to enjoy the false spring...or is it a premature summer?

Ideal weather to hit the fairways, if that’s your thing — how about going to a club owned by Arcis Golf? The company, which is one of the largest operators of private golf clubs in the US, raised $200m this week to fuel its expansion. Arcis is betting that the boom in golf seen during the pandemic will not prove fleeting.

If you’re not into golf, consider a soiree at one of Ryman Hospitality’s properties. The hospitality REIT refinanced its term loan debt and is looking to pump cash into existing assets in anticipation of continued post-Covid travel demand.

Calderys also hit the market the week with a debut bond offering that funds the merger of two businesses: HarbisonWalker and the high-temperature solutions division of Imerys.

Inflection point?

Packaging company Ball Corp and information management business Iron Mountain meanwhile raised $1bn each with double-B rated high yield debt, while food packaging company Imperial Dade printed a $2bn TLB.

Still, primary activity remains fairly light overall. Sources we spoke to this week are bracing themselves for a bumpy ride as conversations around the debt ceiling drag on, which could have an impact on primary market deal flow.

“Our take is that it's better to be safe than sorry so we’re positioning defensively,” said a portfolio manager. “My guess is there will be a compromise on spending and that would be helpful to have as we go into a recession.”

Investors and credit analysts have raised the point that credit spreads do not reflect the tightening in lending standards and higher probability of a US recession, in light of recent trouble in the banking sector.

On the flipside, there’s a strong technical backdrop given light new issue supply. Corporate balance sheets are also considered to be in good shape heading into a potential downturn, which is proving supportive. But for how long?

“The question that comes to my mind is, are we at an inflection point where there is a lag effect and there's going to be sort of a catch up in the next 6-12 months that we're likely to see?” said a second portfolio manager.

The art of the covenant

In this environment, lenders are bracing for more lender on lender violence. With tighter debt markets and higher interest costs weighing on free cash flow, conditions are ripe for sponsors to take advantage of the loose documentation they’ve built into their deals over the past few years.

We did a deep dive on the sponsors that lenders are most worried about. (This article is free to read here).

CD&R and Stone Point also gave an example this week of the kind of behavior that lenders are looking out for, as they took advantage of a loophole in the credit agreement to fund their buyout of Focus Financial more economically. (This article is free to read here as a sample of our premium content).

Focus’ current agreement states that a change in majority ownership of the stock does not constitute a change of control if permitted holders continue to control the board of directors.

Given that existing shareholder Stone Point is already a permitted holder and is set to nominate a majority of board members — in spite of CD&R taking a majority stake — the company only had to raise an incremental $500m loan to fund the buyout instead of refinancing all its existing debt.

Private credit update

In the world of private credit, direct lenders are bracing themselves for a wave of industry M&A, but merging with another firm may be a good move, especially with a recession on the horizon.

The turning cycle is also increasing pressure in a different way: with a gloomy earnings outlook and rising cost of borrowing, direct lenders are recording a decline in interest coverage ratios at their portfolio companies. (This article is available as a sample of our premium content here).

But demand for private credit financing is still hot — sources told 9fin this week that Warburg Pincus and Advent International have tapped a group of direct lenders led by Ares, HPS and Blue Owl for a $1.9bn facility to fund its buyout of Baxter International’s biopharma solutions business.

One more thing to look out for before you catch the New York sunshine: our editor Will Caiger-Smith sat down with 9fin’s debt covenant expert James Wallick in this week’s episode of Cloud 9fin to talk about Focus Financial’s special situation and its possible implications. Check it out on Transistor, Apple Podcasts or Spotify.