Technology learning platform Pluralsight, backed by Vista Equity Partners, raised new preferred equity financing through a drop-down transaction, where Vista moved intellectual property from the company to a restricted subsidiary.
Pluralsight used the financing to pay interest obligations, according to media reports. The sponsor also marked its equity position in Pluralsight down to zero.
The move has rattled direct lenders, who provided a $1.175 billion recurring revenue loan and $100 million revolver to Pluralsight in 2021 to support Vista’s buyout. Pricing on the loan was S+800. The buyout was valued at $3.5 billion, according to a December 2020 company statement.
Lenders on the existing loan include Blue Owl, Ares, Goldman Sachs, Benefit Street Partners, BlackRock, Oaktree, and Golub Capital.
Some have already marked down loans to the company in their portfolios. According to Blue Owl Capital Corp. Form 10-Q filings from May 8, Blue Owl marked its position down to 83.5 cents on the dollar as of March 31.
A drop-down transaction occurs when a borrower creates an unrestricted subsidiary to secure new debt and uses the newly transferred assets as collateral. This weakens existing lender recoveries since they no longer have access to the assets as their collateral.
Lender protections against these types of liability management transactions have been formalized in the broadly syndicated market, known as J.Crew protections, owning to J.Crew’s drop-down transaction in 2016.
Market participants have typically argued that such transactions don’t occur in private credit markets, since the clubs are smaller and there is a greater focus on relationships.
The occurrence of a J.Crew style transaction in private credit calls into focus the terms that direct lenders have agreed to in their documents, market sources said, especially as deals have become more covenant-lite.
“Once the seal has been broken of these blue-chip private equity firms disadvantaging their lenders, then all bets are off,” said HPS Investment Partners managing director Colbert Cannon, speaking at a May 16 Moody’s conference on private credit.
Based in Draper, Utah, Pluralsight is a cloud-based technology learning platform for professionals, focused on technology skill development courses.
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