Tech triumph
Financial technology firm Finastra's US$4.8bn unitranche loan underscored how private debt lenders have established themselves as capital providers of choice for lower-rated companies that find it hard to refinance existing debt.
Inflationary costs and a higher-for-longer interest rate environment are squeezing borrowers' costs and deteriorating their credit profiles. Additionally, as investors became more cautious and banks took a step back from lending last year, fearing they may underwrite loans that they could not sell, borrowers had to look for alternative solutions to refinance maturing debt.
The Finastra loan is the second-largest unitranche loan on record, just behind a US$5.1bn unitranche deal obtained by SoftBank Group in the first half of 2022. Oak Hill Advisors and Blue Owl led the deal, which was ultimately joined by 20 financial institutions. It comes with a US$500m revolving credit for a total of US$5.3bn.
"What we're seeing in this deal is very much an evolution and a reflection of the underlying trends in the leveraged finance market with the increasing prominence of private credit for companies that historically accessed the syndicated markets," said Izzy Goncalves, managing director and product specialist at Oak Hill. "These are larger companies. We think it is very reflective of that underlying secular change."
Finastra carried debt initially issued in the syndicated market due in 2024.
In recent years, the private debt market has risen as an increasingly viable solution for companies due to its speediness and certainty of funding. However, those benefits usually come at a price. Finastra's unitranche deal has a six-year maturity and is priced at 725bp over SOFR with an OID of 98. To make the loan more attractive to direct lenders, private equity owner Vista Equity Partners was compelled to add to the mix US$1bn of preferred equity.
In March, Moody's downgraded Finastra's corporate family rating to Caa1 from B3 in light of a US$375m revolving credit facility set to expire in March 2024 and a US$4.1bn senior secured first-lien term loan due in June 2024.
"We realised that these maturities were coming, and we had to be proactive about it. So we negotiated and structured a refinancing of the company's existing syndicated first-lien and second-lien debt with a private unitranche," Goncalves said.
Oak Hill also contributed an US$800m anchor commitment, he said. Oak Hill had been a lender to Finastra, formerly known as Misys, for more than a decade.
"We're increasingly seeing that it's not just the economics that borrowers put value on, but the flexibility. It's the customisation. It's the desire to concentrate with a smaller group of lenders, [and] not deal with a larger lender group that may create complications over the life of the loan," Goncalves said.
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