A fight between a giant squid and a whale is nearly impossible to witness, yet scientists know it happens. Similar is the struggle between two major arenas in leveraged finance: the syndicated loan market and private credit.
As with whales that have emerged from the depths with wounds from potential prey, evidence of a hard-fought battle surfaced in credit markets this week.
The result shows that the syndicated loan market will not let lucrative financing transactions slip away without a fight.
Details emerged Tuesday about a new version of the financing backing a buyout of Copeland, Emerson Electric‘s Climate Technologies business, this time in the syndicated loan market. Lead arrangers are RBC Capital Markets and Barclays.
Price talk on a $2.75 billion, seven-year term loan B is Sofr+350, with an OID of 99. At talk, the yield to maturity is 9.07%. The loan will be issued with six months of 101 soft call protection. EMRLD Borrower LP is the borrower.
What’s interesting about this financing transaction is that just six months ago the deal was announced, with great fanfare, as a private credit transaction. To make it work it had a slightly unconventional structure.
As of this week, that private credit deal is no more.
It may have disappeared undetected. But it came quickly after the disappearance of another potentially giant-sized private credit debt deal, Cotiviti.
Investors heard earlier this month that negotiations between Veritas Capital and Carlyle Group over a purchase of a stake in Cotiviti had broken down, dashing hopes of a record-sized $5.5 billion unitranche loan backing the transaction coming to market. Private credit investors, flush with cash after recent years of fundraising, had been eager to lend to Cotiviti: the deal was heavily oversubscribed and ready to close, according to market sources.
Another deal to watch emerged this week: Financial services software company Finastra is considering a private credit transaction to refinance syndicated term loans. Oak Hill Advisors is leading the transaction. Finastra (formerly known as Misys) has a $375 million revolver that expires in March 2024 and $4.1 billion in first-lien term loans due June 2024.
Below the depths
The Emerson carve-out buyout transaction is due to close in the first half of 2023.
The financing commitment, which lenders had not yet funded, will be “refinanced” into the syndicated term loan transaction. Would-be arrangers on the private credit transaction are owed an “alternative transaction fee,” sources said.
Recall that in November, news about financing backing the Emerson unit carve-out by Blackstone emerged as a $2.6 billion, seven-year Sofr+675 term loan B, a $700 million asset-based loan, and a $2.9 billion Sofr+450 term loan A. The term loan B and the term loan A were pari passu, or on equal footing in the capital stack.
Sixth Street and Goldman Sachs Asset Management were leading the deal. RBC, Wells Fargo, and SMBC were providing the bank debt.
The private credit transaction was in response to severe dislocation in the syndicated loan market that rendered it nearly impossible to finance buyouts in the bank loan market. The vast majority of recent buyout deals have been financed in the private credit market, LCD data show.
The private credit version of the Emerson/Copeland deal, with the pari passu arrangement between the two lender groups, reflected increased risk aversion that took hold in private credit in the second half of 2022, resulting in smaller hold sizes of loans and higher spreads.
What’s important to note regarding Emerson/Copeland is that the transaction had all along been considered a higher-quality deal, one that more typically would have been found in the syndicated loan market, according to sources. Ratings reflect that.
As part of the syndicated loan financing transaction this week, facility ratings for the term loan came in at BB-/Ba3/BB+, with recovery ratings of 3 and 2 from S&P Global Ratings and Fitch, respectively. Fitch also assigned a BBB- issue rating and 1 recovery rating to an accompanying ABL revolver. Corporate ratings are BB-/B1/BB, with stable outlooks from all three agencies.
Private credit loans typically are unrated.
Blackstone agreed in October to acquire a majority stake in the business from Emerson Electric (NYSE: EMR) in a deal valued at $14 billion. Emerson will receive $9.5 billion in cash and will retain a minority interest in the company. Copeland manufactures heating, ventilation, air conditioning, and refrigeration (HVACR) components and distributes them globally.
Featured image by Atomic Roderick/Shutterstock
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