Private Lenders Make Offer Banks Can’t Match in Record Buyout Loan

Lisa Lee and Davide Scigliuzzo, Bloomberg News

(Bloomberg) — Private credit lenders are considering making a rare concession in a proposed $5.5 billion financing for the leveraged buyout of health-care technology firm Cotiviti Inc., the latest move in an effort to seal a deal that has attracted competing interest from banks.

The direct lenders are discussing a structure that would allow Cotiviti to pay part of the interest on the loan with additional debt, according to people with knowledge of the matter. The payment-in-kind arrangement would reduce the interest burden for the company, and provide more financial flexibility, said the people, who asked not to be identified when discussing confidential information.

The PIK feature — one of the most borrower-friendly concessions lenders can make — would give a clear advantage to private credit funds over Wall Street banks, which are still struggling to offload financings they got stuck with last year as loan and bond markets soured and investors dialed back risk. Talks about the PIK feature for the Cotiviti loan are still preliminary, and it may ultimately not become part of the financing, the people said.

Apollo Global Management Inc., Blackstone Inc., HPS Investment Partners and Ares Management Corp. are among the firms that have offered to participate in the private loan for Cotiviti, Bloomberg previously reported. Oaktree Capital Management, Oak Hill Advisors LP, KKR & Co. and the asset management arm of Goldman Sachs Group Inc. are also part of the discussions, the people said.

Representatives for Veritas Capital and Carlyle Group Inc., the deal’s private equity sponsors, declined to comment. Spokespeople for the lenders declined to comment.

The PIK structure is unusual for large buyout financings provided by private credit lenders, and highlights a degree of flexibility that Wall Street leveraged finance desks would have a hard time replicating, according to market participants. Because banks ultimately need to find third-party buyers for the buyout loans and bonds they agree to provide, committing to a PIK deal in the current market environment would mean making a bet that risk appetite among investors will improve markedly over the coming months.

In the public markets, PIK debt is often reserved for struggling companies that are desperate to conserve cash, or for buyouts where all other types of potential debt are essentially maxed out. PIK structures are especially rare in the syndicated loan market given that the biggest investors — collateralized loan obligations — typically shy away from them.  

One of the last deals to feature a PIK component — the financing for Clayton Dubilier & Rice’s buyout of Cornerstone Building Brands Inc. — ended up saddling a group of lenders led by Deutsche Bank AG and UBS Group AG with around $200 million of losses after the banks sold some of the debt back to the sponsor at a significant discount to face value.

Having a portion of the loan in PIK form provides more cash to fuel growth — especially as higher interest rates crimp cash flow. While Cotiviti already has about $5.1 billion of existing debt that’s being replaced, the cost of financing was lower on the old deal relative to the new debt package.

Bloomberg previously reported that direct lenders were working on a $5.5 billion loan to finance the Cotiviti deal, which values the company at nearly $15 billion. If the transaction is successful Carlyle will acquire half of the company, while Veritas will continue to own the other half. The loan would be the largest buyout financing ever arranged by private credit firms.

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Source: Bloomberg