Private credit groups including Apollo, Ares and Blackstone are poised to write the largest direct loan on record as they continue to muscle in on a lucrative business traditionally dominated by Wall Street banks.
The lenders are increasingly confident they can edge out investment banks including JPMorgan Chase and Goldman Sachs in a deal to fund Carlyle’s acquisition of a 50 per cent stake in healthcare analytics company Cotiviti, according to five people briefed on the transaction.
The $5.5bn loan to help buyout group Carlyle acquire the stake from rival Veritas Capital would be the biggest of its kind and could be announced in the coming days or weeks, the people added. The deal values Cotiviti at roughly $15bn.
It underscores the growing power of private credit providers in the wake of the global financial crisis, which ushered in a new era of tougher capital requirements for banks that made it harder for them to fund risky takeovers.
The trend has only accelerated in recent months after gyrating bond markets left banks struggling to offload debt they provided to fund big takeovers, including Elon Musk’s buyout of Twitter.
“No longer is the large deal just the provenance of the banks,” said Kipp deVeer, head of credit at Ares.
The financing package for Cotiviti, which would be accompanied by a $1bn investment in preferred shares, is one of several large private loans being discussed, according to executives in the private capital industry.
The size of the potential deals is much higher than it would have been a few years ago when private loans tended to top out at $1bn to $2bn.
“Folks have dry powder,” deVeer said. “If there is a high-quality company and high-quality transaction, most folks will . . . find plenty of capital and capacity to do that.”
The amount of capital on offer is the product of a wave of fundraising by private credit funds, many of them operated by companies that started out as pure-play buyout groups.
There has been an influx of retail investors into funds such as Blackstone’s private credit investment fund, known as Bcred, over the past three years, helping private capital groups write ever-larger cheques. Even after a wave of recent outflows, institutional investors remain committed to the market.
Last week, Oaktree Capital co-founder Howard Marks told clients the group was trying to raise $10bn to fund loans for big buyouts. A few days earlier, Ares chief executive Michael Arougheti announced that the company would “embark on a pretty significant fundraising push”.
The non-bank lenders have been attracted by the high returns on offer, with many loans yielding 6 or 7 percentage points over the floating rate benchmark, or roughly 11 per cent or 12 per cent in total. That number will rise further if the Federal Reserve and other central banks press ahead with their campaign to raise interest rates.
“It has evolved into a consistent financial tool for borrowers and it has gone more and more upmarket,” said Dan Pietrzak, co-head of private credit at KKR. “The market has the capacity to do these multibillion-dollar deals.”
Banks have been powerless to prevent the loss of the lucrative business to private credit rivals because the market for offloading debt to third-party investors has dried up of late.
Lenders including Bank of America and Barclays have been forced to hold on to loans made to fund large buyouts, including the Twitter deal and the takeover of Citrix, leaving them nursing big losses.
Alex Popov, head of illiquid credit at Carlyle, said “2022 really stopped capital markets. In terms of dislocation, this was as pronounced as it gets, where underwriters for any new transactions were essentially out of business.”
Private credit remains one of the few sources of capital available at a time of tighter financial conditions, even after high-yield bond and leveraged loan markets have started to recover.
Data from PitchBook LCD shows the vast majority of deals in the syndicated loan market — where banks underwrite the debt before selling slices of it to investors — have been done to refinance existing borrowings rather than funding takeovers.
Bankers say the trend could reverse if markets become less volatile. “A lot of underwriters are on the sidelines and so to get a syndicated deal underwritten at scale is challenging. But . . . people will come back,” said Rob Fullerton, global head of leveraged finance at Jefferies.
There was strong demand for the Cotiviti loan, the people briefed on the transaction said, with groups including HPS Investment jostling for a piece of the action alongside Apollo, Ares and Blackstone.
Given the high level of demand, Carlyle has managed to push down the yield on the loan to about 6.25 percentage points over the Sofr benchmark rate, compared with the 6.5 percentage points that had been previously discussed, according to the people briefed on the talks.
The private capital groups are discussing a sweetener that would allow Cotiviti to pay the interest on the loan by raising more debt, which is a factor in Carlyle preferring the funding package over a competing one being pitched by JPMorgan and Goldman Sachs.
The discussions over the so-called payment-in-kind provision are still at an early stage and may not pan out. Two of the people said its inclusion in the deal would allow Cotiviti to preserve cash when the US is flirting with a recession.
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