Private lenders secured a significant concession from a prominent technology-focused leveraged buyout firm this week. They demanded that the firm invest $1 billion to assist a portfolio company with its impending debts.
Finastra, a financial technology company, needed to refinance its debts due in the following year, totaling $4.8 billion. Lenders required Vista Equity Partners, the company’s owner, to contribute the additional $1 billion in exchange for the loan. This deal could potentially serve as a template for other leveraged buyout firms facing challenges such as slower growth, higher interest rates, and difficulties in refinancing debts beyond 2025 through traditional capital markets.
Vista had to resort to private lenders in the growing $1.5 trillion private credit industry rather than turning to banks. While private credit offers a lifeline for private equity groups to sustain their investments, it comes at a high cost. Finastra’s six-year loan carries an interest rate of approximately 12.6%.
Michael Patterson, a governing partner at HPS Investment Partners, acknowledged that private equity’s increased capital infusion into these structures is an ongoing trend. Private equity aims to maintain ownership and allow businesses more time to overcome challenges within the current economic cycle.
Finastra’s decision to seek direct lenders was driven by lackluster demand in the bank loan market and the company’s own struggles. Asset managers like Blue Owl, Sixth Street, and HPS Investment Management have been competing with banks to lend to larger businesses.
Additionally, collateralized loan obligations, which are major purchasers of riskier bank loans, have slowed down their purchases. This shift is expected to push other private equity groups toward private credit.
“Ratings are a huge issue for CLOs,” said Craig Packer, co-president of Blue Owl Capital. “The public markets are not as flexible as perceived. Private lenders can conduct diligent assessments, make judgments, and take a long-term view.”
Vista had been pressuring private lenders for months to secure a multibillion-dollar loan to refinance existing debt for Finastra. Throughout the process, they sought proposals that would allow them to avoid injecting any additional funds into the company.
However, concerns arose regarding Finastra’s ability to manage its debt load. The company, acquired by Vista in 2012 and expanded through several acquisitions, including a $3.6 billion deal in 2017, was struggling due to market freezes caused by signals from the Federal Reserve about aggressive interest rate hikes.
As a result, private equity groups are holding onto businesses longer than anticipated, which exposes them to the debts that would typically be managed by new owners after a sale.
Vista’s refinancing plan initially aimed to borrow $6 billion from private lenders. However, difficulties emerged, and lenders suggested splitting the loan into senior and junior debt. The junior debt, with a tantalizing yield of 12 to 12.5 percentage points over the floating rate benchmark, was deemed too expensive and failed to attract enough lenders.
Refinancing was crucial as Finastra faced maturity of its loan and revolving credit facility in 2024. Most companies typically refinance their bonds and loans at least a year prior to maturity to avoid becoming current liabilities on their balance sheets.
As the summer progressed, Vista reluctantly accepted the need to inject 1 billion dollars. Various investors, including Blue Owl, Ares, Oak Hill, HPS Investment Partners, Oaktree, and Elliott Management, agreed to lend the required $4.8 billion. The loan carries an interest rate of approximately 7.25% above the benchmark rate and was offered at a slight discount to par value.
Vista structured its $1 billion investment as preferred equity, giving it seniority over Finastra common stock. Private equity sponsors have other options, and many are reluctant to inject additional funds into struggling investments, especially those from older funds approaching closure.
Some remain hopeful that the public markets will rebound and attract a wider range of buyers for high-yield bonds and leveraged loans. There are indications that this is already happening, with JPMorgan Chase and Goldman Sachs lining up $8.4 billion in debt to finance GTCR’s majority stake acquisition in payments provider Worldpay.
Lenders and investors observed that recent deals reflect new financial conditions, accounting for slow growth and higher interest rates, factors that were not as prevalent during deal signings between 2018 and 2020. Consequently, debt levels are being more cautiously managed.
However, older deals held by buyout firms present a different situation. Companies with weaker credit quality and near-term maturities may turn to private credit, as lenders in this sector have a higher risk tolerance, which is mitigated by the potential of equity contributions from private equity owners, according to Christina Padgett, head of leveraged finance at Moody’s.
“It’s the responsibility of the sponsor to defend their portfolio,” stated John Kline, managing director of New Mountain Capital. “Sponsors will make rational decisions to support their strong assets, not allowing minor interest expenses or leverage to hinder the future of the business. They may choose not to defend underperforming assets.”
Despite the challenges, there is hope that public markets will recover, leading to a broader range of buyers for high-yield bonds and leveraged loans. JPMorgan Chase and Goldman Sachs have recently lined up $8.4 billion in debt to finance GTCR’s majority stake acquisition in payments provider Worldpay.
The key difference is that recent deals reflect a new financial landscape with slower growth and higher interest rates. Buyout firms are managing debt levels more conservatively compared to deals made between 2018 and 2020. However, older deals present a different challenge for buyout firms.
“Private credit may appeal to issuers with weaker credit quality and near-term maturities,” noted Christina Padgett, head of leveraged finance at Moody’s. “Private credit lenders have a higher tolerance for risk, which is balanced by the potential equity contribution from private equity owners.”
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