Private equity firms soften stance on US buyout loans

By Jonathan Schwarzberg

NEW YORK, Jan 18 (LPC) - Private equity sponsors are softening their traditionally aggressive stance towards lenders and are making concessions to help struggling US buyout loans over the line after heightened volatility in December hit investor appetite in January.

Sponsors, including CVC Capital and Apollo Global, are agreeing to improve terms to help deals clear the market and protect their reputations after equity market volatility pulled secondary loan prices lower in December, making new loans harder to sell.

LPC’s index of heavily traded loans bottomed at a multi-year low of 94.57 on December 28, down 434bp from 98.91 on October 8 and was 96.69 on January 17. The prospect of losses for investors joining new deals is prompting concessions from private equity firms that previously took no prisoners.

Higher yields and heavy loan outflows are also fueling a more conservative approach. Average first-lien yields jumped to 6.72% in the fourth quarter of 2018, and retail investors withdrew an additional US$942.9m from loan funds this week in the ninth week of outflows, after a record monthly outflow of US$14.95bn in December.

“I would say that sponsors understand that if you are in a bit of a downdraft in the market and you don’t help out right now banks might be more reticent on the next deal,” said a banker.

Concessions start with improving terms, which is a relatively inexpensive option. These often include extending call protection or limiting the amount of additional debt that can be raised, and also ensuring that it will price at a similar level to existing debt with Most Favored Nation clauses.

Pricing and Original Issue Discounts (OID) are then adjusted, which can be accommodated within flex terms but can cause losses for banks if it exceeds those levels. Some private equity firms are also putting additional equity into struggling deals to reduce debt and make them more attractive.

Private equity firm CVC Capital took a careful approach with its buyout of information services provider ConvergeOne in early January, and added fresh equity to reduce leverage and investors’ risk and make the deal more attractive.

The deal was launched on November 28 with a December 11 deadline, but was postponed at the end of the year to wait for improved market conditions and additional options. Banks funded the loan in the first week of January after CVC allowed them to make additional changes to make the deal more attractive, and will bring it back to the market shortly.

The banks increased the first-lien tranche, which has more security, to US$960m from US$925m and cut the riskier second-lien tranche to US$275m from US$350m.

Bankers said that CVC had gone beyond what other private equity firms would normally do in similar situations to ensure that investors joined the deal.

“They (CVC) seem worried to make sure that banks aren’t losing money,” a second banker said.

Deutsche Bank is leading the first-lien tranche and UBS is leading the second-lien tranche. Both banks and CVC declined to comment.

HARD BALL

Apollo Global, a firm known for playing hard ball, was the first private equity firm to adopt a softer approach in November and bow to investors’ demands to avoid the stigma of pulling a deal from the market.

“Once you launch a deal and pull it, it’s over,” the second banker said. “It will always have that on it even if it’s a fine credit.”

Apollo increased pricing on a US$3.55bn term loan backing the buyout of hospital operator LifePoint Health to 450bp over Libor from guidance of 400bp over Libor. The firm also approved several other investor-friendly changes such as extending call protection and cutting the size of restricted payments.

Citigroup led the LifePoint transaction and declined to comment, as did Apollo.

The private equity firm also made adjustments to a US$275m loan backing its acquisition of infrastructure assets from General Electric to help banks after the the deal was pulled in December, source said. The deal was funded by banks, including lead Royal Bank of Canada. RBC did not immediately return a request for comment.

Until money starts flowing back in, sponsors are expected to continue to be constructive as they have money on the sidelines waiting to be deployed and need a smooth-running market.

“Private equity firms will probably keep this up and make more concessions,” said an underwriter. “At least until the first deal gets oversubscribed.” (Reporting by Jonathan Schwarzberg. Editing by Tessa Walsh and Michelle Sierra)