Unlock the Editor’s Digest totally free
Roula Khalaf, Editor of the FT, selects her favorite tales on this weekly e-newsletter.
Blackstone, Elliott Administration and Vista Fairness Companions have used sturdy demand for debt to chop borrowing prices and fund dividend funds, as buyout retailers take advantage of the rally since Donald Trump gained the US election.
The bond and mortgage gross sales are a part of a flurry of debt refinancings as corporations have raced to lock in decrease borrowing prices, marking a sea change from when many of those buyouts had been struck.
They’ve been significantly notable given the injury some offers — together with the buyout of software program maker Citrix — induced to banks shortly after they had been clinched in 2022 when markets seized up. Some sponsors, like Blackstone, had been left doing gymnastics to safe financing on the time.
However the rebound in monetary markets and the return of the most important purchaser of leveraged loans imply buyout teams are actually looking at a very totally different image.
This week, Copeland, a Blackstone-backed heating and air con know-how enterprise, borrowed $675mn to pay a dividend to the buyout group. The sturdy investor demand allowed the corporate to lock in an rate of interest simply 2.5 proportion factors over the Sofr floating fee benchmark, for a yield of roughly 7.3 per cent, in accordance with folks briefed on the matter.
When the deal was first introduced in 2022, Blackstone needed to cobble collectively loans from a coterie of personal credit score lenders, banks, and in an uncommon transfer, the very company selling it the enterprise. The personal credit score loans had been set to yield north of 11 per cent, priced 6.75 proportion factors over the Sofr.
Days after Copeland raised its new debt this week, Elliott and Vista secured $6.5bn for know-how firm Cloud Software program Group. The corporate, which was created by the pair’s $16.5bn acquisition of Citrix, shaved tens of tens of millions of {dollars} off its debt prices by repricing a $4.5bn mortgage and shifting the maturity of $2bn of debt again by two years to 2031.
It’s the newest push by Elliott and Vista to bolster their 2022 funding. Banks suffered $1.5bn of losses on the Citrix deal as they lower their publicity to the loans at low cost costs, with Elliott agreeing to purchase up among the debt itself.
“The market was nearly as bad as it has been . . . going again to the worldwide monetary disaster,” mentioned one buyout group government.
However as Cloud’s enterprise has rebounded and earnings have climbed, credit score traders have flocked again. Costs of the debt rallied over the previous 18 months, permitting Elliott and Vista to refinance their present loans, elevate new debt and pay down excessive price obligations, together with $2.5bn of dangerous most well-liked fairness that paid dividends at a whopping fee of 12 per cent over Sofr.
The 2029 maturing term-loan repricing this week in contrast priced with a coupon 3.5 factors over Sofr, yielding roughly 8.25 per cent.
“The market needs paper,” mentioned Randy Parrish, head of public credit score at Voya Funding Administration. “You’ll have traders who will really go to the borrower and say: ‘Hey, I’d be prepared to fund a $500mn dividend for you at a better coupon.’ And that’s not wholesome.”
The demand has been supercharged by a rebound in structured credit score markets, as insurers and different traders flood again into collateralised mortgage obligations — the funding autos which can be the most important consumers of leveraged loans.
With world dealmaking nonetheless far beneath 2021’s file highs, bond and mortgage portfolio managers have additionally been left to battle over a smaller pool of debt. JPMorgan Chase estimates that the ensuing refinancing spree has allowed leveraged mortgage debtors to chop $3.1bn in curiosity prices this yr.
Riskier debt offers are additionally showing, together with bonds the place corporations wouldn’t have to pay curiosity prices with money, however can as a substitute accrue extra debt. RR Donnelley, a advertising and printing firm, this week raised $360mn by means of that construction, a so-called PIK toggle bond. The corporate, bought by personal fairness group Chatham Asset Administration in 2022, used the cash to pay down a few of its present debt.
Pimco portfolio supervisor David Forgash mentioned that current exercise in debt markets was the “definition of frothy exercise”.
“If you begin to see dividend recaps, PIK offers, that could be a crimson flag saying that there’s an excessive amount of optimism available in the market and traders are reaching,” he mentioned. “Some of what’s being delivered to the market now traders will want they hadn’t bought.”
Blackstone, Elliott, Vista, Chatham and Copeland declined to remark. Cloud Software program and RR Donnelley didn’t reply to requests for remark.
