Paving the way
The US$1.96bn debt package backing Blackstone and Canada Pension Plan Investment Board's purchase of drug research services company Advarra exemplified how direct lending became an increasingly important source for buyout financings in 2022, when uncertain macroeconomic conditions plunged the traditional syndicated leveraged market into turmoil.
When the US$5bn buyout of Advarra was first discussed, the company had Ebitda of US$190m, which historically would have put it outside the realm of private debt funding – typically, financings for companies with more than US$125m of Ebitda would look to the syndicated loan market.
However, with liquidity in the broadly syndicated market increasingly scarce, as volatility mounted following Russia's invasion of Ukraine in February and the US Federal Reserve had raised rates, the sponsors decided the direct lending market would be a more efficient funding solution when it started exploring options in March.
"Two billion dollars? You think [now], of course. The private market can handle two billion of debt," said Susan Weiss, managing director at Blackstone. "At the time, it wouldn't have been the natural decision. It was one of the first deals that opened the door for normal-way credits to access that market.”
The financing carried a total leverage of 8.75 times and the sensitivity of the purchase also made the private debt market a strong option.
"An 8.7 times leverage is a high mark that would probably never exist in the syndicated market as a primary deal," said Taylor Short, vice-president at Blackstone. "Not only were we able to raise US$2bn at a time when US$2bn was tough but hitting that total leverage in the functioning syndicated market was probably impossible to do. This was a better ... solution."
Financing the transaction required a tailor-made package, which the private debt market was able to provide. First, to keep the process more efficient and to prevent information leaks, the seller wanted to limit the scope of lending partners. Second, Advarra, being one of a few market leaders in its sector, needed to keep the company's metrics from landing in competitors' hands.
"I'd like to think of us like the New England Patriots under Bill Belichick. We like all weather conditions. We know how to play in the snow, the rain, and under the sun. We're huge fans of every single market," Weiss said.
The financing package comprised a U$150m super-priority revolving credit, a US$1.66bn unitranche and a US$150m delayed draw term loan. The unitranche and delayed draw loans ultimately priced in May at 575bp over SOFR with a 98.25 OID, achieving one of the year's lowest rates.
The loans were placed among several direct lenders. The RCF was placed separately.
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