Unlock the Editor’s Digest for free
Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
Blackstone, Elliott Management and Vista Equity Partners have used strong demand for debt to cut borrowing costs and fund dividend payments, as buyout shops make the most of the rally since Donald Trump won the US election.
The bond and loan sales are part of a flurry of debt refinancings as companies have raced to lock in lower borrowing costs, marking a sea change from when many of these buyouts were struck.
They have been particularly notable given the damage some deals — including the buyout of software maker Citrix — caused to banks shortly after they were clinched in 2022 when markets seized up. Some sponsors, like Blackstone, were left doing gymnastics to secure financing at the time.
But the rebound in financial markets and the return of the largest buyer of leveraged loans mean buyout groups are now staring at a completely different picture.
This week, Copeland, a Blackstone-backed heating and air conditioning technology business, borrowed $675mn to pay a dividend to the buyout group. The strong investor demand allowed the company to lock in an interest rate just 2.5 percentage points over the Sofr floating rate benchmark, for a yield of roughly 7.3 per cent, according to people briefed on the matter.
When the deal was first announced in 2022, Blackstone had to cobble together loans from a coterie of private credit lenders, banks, and in an unusual move, the very company selling it the business. The private credit loans were set to yield north of 11 per cent, priced 6.75 percentage points over the Sofr.
Days after Copeland raised its new debt this week, Elliott and Vista secured $6.5bn for technology company Cloud Software Group. The company, which was created by the pair’s $16.5bn acquisition of Citrix, shaved tens of millions of dollars off its debt costs by repricing a $4.5bn loan and shifting the maturity of $2bn of debt back by two years to 2031.
It is the latest push by Elliott and Vista to bolster their 2022 investment. Banks suffered $1.5bn of losses on the Citrix deal as they cut their exposure to the loans at discount prices, with Elliott agreeing to buy up some of the debt itself.
“The market was just about as bad as it has been . . . going back to the global financial crisis,” said one buyout group executive.
But as Cloud’s business has rebounded and earnings have climbed, credit investors have flocked back. Prices of the debt rallied over the past 18 months, allowing Elliott and Vista to refinance their existing loans, raise new debt and pay down high cost obligations, including $2.5bn of risky preferred equity that paid dividends at a whopping rate of 12 per cent over Sofr.
The 2029 maturing term-loan repricing this week by contrast priced with a coupon 3.5 points over Sofr, yielding roughly 8.25 per cent.
“The market wants paper,” said Randy Parrish, head of public credit at Voya Investment Management. “You’ll have investors who will actually go to the borrower and say: ‘Hey, I’d be willing to fund a $500mn dividend for you at a higher coupon.’ And that’s not healthy.”
The demand has been supercharged by a rebound in structured credit markets, as insurers and other investors flood back into collateralised loan obligations — the investment vehicles that are the largest buyers of leveraged loans.
With global dealmaking still far below 2021’s record highs, bond and loan portfolio managers have also been left to fight over a smaller pool of debt. JPMorgan Chase estimates that the resulting refinancing spree has allowed leveraged loan borrowers to cut $3.1bn in interest costs this year.
Riskier debt deals are also appearing, including bonds where companies do not have to pay interest costs with cash, but can instead accrue more debt. RR Donnelley, a marketing and printing company, this week raised $360mn through that structure, a so-called PIK toggle bond. The company, purchased by private equity group Chatham Asset Management in 2022, used the money to pay down some of its existing debt.
Pimco portfolio manager David Forgash said that recent activity in debt markets was the “definition of frothy activity”.
“When you start to see dividend recaps, PIK deals, that is a red flag saying that there is too much optimism in the market and investors are reaching,” he said. “Some of what is being brought to the market now investors will wish they hadn’t purchased.”
Blackstone, Elliott, Vista, Chatham and Copeland declined to comment. Cloud Software and RR Donnelley did not respond to requests for comment.
https://www.ft.com/content/631f4b95-ad8b-4e9a-bedc-9d697c5dd00f
