US LevFin Wrap — Diversified brings zero-coupon, Shearer’s splits LBO financing, ESG takes a back seat

David Bell

22 December 2023•5 min read

Primary markets are winding down for the holidays, but activity didn’t dry up entirely this week — creative refinancing solutions from the likes of Diversified Healthcare Trust as well as acquisition financing for Cotiviti and Shearer’s Foods are keeping the sell-side busy late into the calendar year.

Diversified Healthcare’s zero-coupon bond highlighted the creative ways that bankers and borrowers can handle a tricky debt refinancing despite tight cashflow and restrictive credit agreements.

The healthcare REIT was in breach of a debt incurrence test, which prevented it from raising traditional debt to take out upcoming maturities. The solution was a $941m two-year zero-coupon bond that offers investors no cash interest payments.

Instead of cash interest, investors received the bonds at a substantial new issue discount (the company receives only $750m gross proceeds). Buyers could profit on their investment if the notes are redeemed at par when they mature in January 2026. The refi was possible because taking out interest-bearing debt with zero-coupon notes put the company in compliance with its debt incurrence test.

Elsewhere, Everise, a customer management service provider to the tech and healthcare industry, tweaked a $425m offering of term loan debt that’s being raised to refinance its cap stack in conjunction with Warburg Pincus taking a stake in the business.

The company is now offering a $175m term loan A and $250m term loan B, after initially proposing to raise the full amount in a first lien TLB. It’s also raising a new $90m revolver. Warburg Pincus is kicking in new cash equity alongside rolled equity from management and existing sponsor, Brookfield Asset Management.

Office supplier Staples Inc meanwhile told investors this week that it plans to refinance its term loan debt in the second half of 2024, as margins improved despite office attendance leveling out.

In the works

We highlighted last week how there were tentative hopes of a rebound in M&A next year, and a few more examples surfaced this week.

Nippon Steel’s bid for US Steel has raised the hackles of politicians on both sides of the aisle, but is expected to be the first in a string of consolidation plays in the steel industry. This week we looked into the transaction’s impact on the industry — and the potential new M&A targets for competitor Cleveland-Cliffs, which bid unsuccessfully for US Steel.

The syndicated debt markets may have lost a potential high yield financing from Cleveland-Cliff’s unsuccessful bid, but the market could still see some supply from the buyouts of Cotiviti and Shearer’s Foods.

Bank lenders and private credit investors are circling both deals. BSL packages are offering cheaper financing for KKR’s bid for Cotiviti but direct lenders are coming back with potentially higher leverage and lower cash interest thanks to PIK components, according to 9fin sources.

The deal marks Cotiviti’s return to the debt markets after a bid from Carlyle fell through earlier this year. In this week’s UniCrunch private credit newsletter, we highlighted a few other busted sales that could still be resurrected in either BSL or private credit markets, such as Medtronic.

The financing package for CD&R’s acquisition of Shearer’s Foods from Ontario Teachers’ Pension Plan Board meanwhile has an old school flavor: sources told 9fin this week they expect to see around $1.5bn of debt financing split across a syndicated first lien loan and a second lien facility provided by direct lenders.

CD&R’s bid values the snack maker at around $2.8bn, representing a roughly a 9x EBITDA multiple, sources said. Split structures like this were more prevalent before private credit became a more competitive financing option for sponsors.

Ups and downs

The surge of demand that has fueled the rise of private credit shows little sign of relenting — our LP wrap this week highlights some $4.5bn of new allocations to private credit from investors including Chicago Teachers’ Pension Fund.

The problem is finding acquisition targets, which was a similar story for issuers in broadly syndicated debt markets this year. JP Morgan analysts pointed out on Friday that just $96bn was raised across high yield bond and loan markets for acquisitions this year, the lowest since 2009.

“M&A is just taking longer,” said one capital markets lawyer. “People are doing more due diligence, you see more people going back for price adjustments and different things. Back in 2021 and earlier there wasn’t much time to do due diligence, if you're trying to sign up commitment papers in 24 hours.”

It was also a sluggish year for the sale of ESG-related debt, which had a hot moment after the pandemic but has slumped amid political backlash and more pressing financial concerns.

This week’s Cloud 9fin podcast explores those themes further, taking a look at what the declining fortunes of wood pellet manufacturer Enviva means for the state of ESG in America.

Finally, check out the first four parts of our 2024 private credit outlook series: