For years, private credit firms have focused on financing private equity buyouts or closely held companies that had limited access to capital. Now, they are zeroing in on their next frontier: Large public companies that want to diversify their funding mix.
Publicly traded firms have traditionally relied on leveraged loans or revolvers arranged by banks for capital. But they’ve become more comfortable taking private debt as the market has grown, according to market participants. Part of that is tied to direct lenders’ core pitch that they can offer fast and flexible financing, a selling point that has become important to corporates looking to line up debt quickly.
Cloud-storage provider Dropbox upsized its loan with Blackstone Inc. to $2.7 billion last week, just nine months after it struck the initial deal, Bloomberg reported. The company, which has announced plans to buy back $1.5 billion of stock, may use proceeds from the incremental loan to repay convertible notes.
Earlier this year, Humana Inc., an investment-grade rated health insurer, hired Guggenheim Partners to gauge interest in $3 billion private credit financing, according to people with knowledge of the matter, who asked not to be identified discussing private information. The deal didn’t come to fruition, they said.
“Public companies are partnering with private lenders more often,” said Brad Marshall, global head of private credit strategies at Blackstone. “They’re looking for creative solutions and something that can be tailored to them.”
Harley-Davidson Inc.’s shares jumped in late July after the company announced plans to monetize part of its finance unit through the sale of a nearly 10% stake and more than $5 billion of retail loans to KKR & Co. and Pacific Investment Management Co.
A representative for Humana declined to comment, while a representative for Guggenheim didn’t respond to requests for comment.
Private credit firms can sell borrowers on the fact that they can offer options to defer cash interest payments, known as payment in kind, and that their facilities won’t dilute equity. There’s also a wall of public company debt coming due that will need to be refinanced — more than $800 billion in North America and Europe is set to mature by 2027, according to a report from law firm Akin Gump Strauss Hauer & Feld.
Some private lenders are starting to hear from chief financial officers and company executives directly.
“CFOs are becoming more comfortable with private credit, and CFOs and CEOs are increasingly looking to fund their capex in more creative ways using private capital,” said Ranesh Ramanathan, co-leader of the global capital solutions team at Akin Gump.
A number of firms have created strategies targeting public companies, including BC Partners. The firm has been building out a team dedicated to this sort of financing, according to Patrick Schafer, a partner on BC Partners’ credit team.
Schafer said BC is particularly interested in providing financing for micro-cap companies, which typically have market capitalizations ranging from $50 million to $300 million. These are “often inefficiently capitalized, creating an opportunity to re-align the capital structure and pick up a premium,” he said.
The firm recently closed its acquisition of 180 Degree Capital, which provides hybrid capital to both public and private companies.
Pricier Loans
The interest in financing public companies is partially tied to private credit’s push to diversify into more investment-grade opportunities, given many businesses with top credit ratings are publicly traded. Apollo Global Management Inc. has said this high-grade segment could swell the total private credit market to $40 trillion.
This demand is “rising fast,” according to a report from KKR on Thursday. Insurers and pension funds in particular are seeking investments with higher returns to add to longer-term portfolios as yields have tightened in public markets, the firm said in its report.
Private credit firms have also been competing with banks to underwrite debt deals supporting the building of large data centers, which house technology needed to develop artificial intelligence models. Much of this is and will be tied to public investment-grade corporates.
Social media company Meta Platforms Inc. — rated AA- by S&P Global Ratings — recently struck a deal with Pimco and Blue Owl Capital Inc. for $29 billion to finance the development of a sprawling data center in Louisiana.
There’s been an uptick in these sorts of deals as “larger companies seek to maximize flexibility and explore all their options,” according to Bill Eckmann, head of principal finance and private credit for the Americas at Macquarie Capital.
Such optionality can be more expensive. Most investment-grade companies would be able to get friendlier terms in the public bond market, with borrowing costs 150 to 200 basis points cheaper, Dan Pietrzak, global head of private credit at KKR, said.
Even still, investing in public companies is not without risk.
Apollo led a $750 million debt package last year for chipmaker Wolfspeed Inc. Less than a year later, Wolfspeed filed for bankruptcy after failing to come to a deal that would’ve averted a reorganization.
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