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Cotiviti’s $5B LBO leveraged loan signals big win for Wall St. banks

The transaction is a welcome sight for a loan market that has seen precious little net new supply of late, as the environment for acquisitions in 2023 was significantly constrained amid rate hikes, which translated into prohibitively high borrowing costs.

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Leveraged loan arrangers for healthcare data company Cotiviti have approached what is a rejuvenated syndicated loan investor base with a hefty, $5 billion credit that will finance KKR’s recapitalization of the company, alongside existing sponsor Veritas Capital. The deal comprises a $4.4 billion floating-rate term loan and a $600 million fixed-rate term loan, sources say. It also includes a $600 million revolving credit facility.

The transaction is a welcome sight for a syndications market that has seen precious little net new supply of late, as the environment for acquisitions in 2023 was significantly constrained amid rate hikes, which translated into prohibitively high borrowing costs. In fact, last year marked a 13-year low for new dollar-denominated syndicated LBO supply, with just $30.7 billion of that activity in 2023, more than 15% of which was courtesy of one deal, a $5.2 billion term loan for Worldpay that backed GTCR’s carve-out of the payments group in September.

This week’s financing for Cotiviti isn’t necessarily rewriting the record books but it is one of largest buyout term loans over the past two years, since the start of rate hikes. The buyout deal is the fifth largest financed in the broadly syndicated loan market since April 2022 and the largest since September’s Worldpay financing. Furthermore, at $5 billion, it is the second-largest institutional loan financing an LBO over the same period, behind only Worldpay, again.

In addition to providing much-needed net new supply, Cotiviti represents a big win for syndicated lenders, versus a private credit market that has grown seemingly by magnitudes over the past several years, undertaking ever-larger deals and infringing on territory once reserved for arranging banks.

That tide is turning, however. Indeed, Cotiviti explored a deal with The Carlyle Group early last year that valued the company at $15 billion, including debt, before the transaction fell apart. The company was in discussions with private credit providers at the time for a $5.5 billion unitranche loan that would have been the largest-ever financing of that type. The facility was guided at S+650-675, with an original issue discount of 97-97.5, before being scuttled.

In another sign of the re-emerging attractiveness of the syndicated market, as borrowing spreads tighten and demand remains strong, Wood Mackenzie this month syndicated a $1.315 billion, seven-year term loan (S+350, 0% floor) that refinanced a unitranche credit due February 2030. The earlier deal was priced at S+675, with a 0.75% floor.

Cotiviti’s new $4.4 billion floating-rate term loan is offered at S+350, with a 0% floor and an OID of 99.5. To put this spread into context, it is the tightest level for any syndicated loan supporting a buyout of a B2/B rated borrower since the rate hike cycle began in 2022. Indeed, it is the only transaction since January 2022 in this ratings category with a sub-400 bps spread. Casting a wider net, LCD tracked only one LBO-related dollar-denominated loan with lower spreads in the last six months, across all ratings categories: S+300 on the $5.2 billion facility to Worldpay, which is rated BB/Ba3.

A boom in syndicated M&A activity could market a fundamental shift for the asset class. Due largely to the M&A drought, since the midpoint of 2022 the size of the Morningstar LSTA US Leveraged Loan Index has shrunk by roughly $25 billion, meaning the new-issue market did not generate enough deals to cover repayments. Cotiviti’s transaction provides much-needed supply to loan investors in a market that has been dominated by refinancings, repricings and extensions.

Featured image: James Marshall/Getty Images

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