Certainty is everything
In a year when volatility was rampant, private lenders behind the financing of EQT’s acquisition of London-listed veterinary drugmaker Dechra Pharmaceuticals provided the vaccine of certainty.
A group of private lenders, including Blackstone Credit and Goldman Sachs Asset Management, underwrote the £1.25bn-equivalent buyout loan in June. It was a time when most banks’ appetite for new underwritings was yet to fully recover after money was lost on hung deals underwritten in 2022.
EQT opted for a direct loan rather than the broadly syndicated route, despite the extra cost involved. Crucially, however, the direct loan provided certainty on terms and execution. It also enabled the sponsor to forgo a costly rating process, and the risk of price flex which is particularly marked in this kind of public-to-private process that can drag on.
“It’s an unlucky one for us that we missed the trade,” said a leveraged loan banker at one of the large number of banks that lost out in the fight to underwrite the transaction.
The deal was sealed at 6.4 times gross leverage – way above where banks could compete at the time. But private lenders were able to showcase the high leverage multiple they can offer for those risks where they believe in the credit. While it is not historically uncommon for a direct lending facility to fix at a multiple as elevated as 6.4, such levels have not been out in force since before Russia's invasion of Ukraine.
The jumbo deal also demonstrated the depth of liquidity in the private debt market, coming in as one of the largest UK take-privates in 2023.
The seven-year senior term loan was split between a £625m-equivalent US dollar-denominated facility and a £625m-equivalent euro-denominated facility, with the margin dependent on the company’s consolidated first-lien net leverage ratio.
The margin came at 625bp over SOFR/Euribor for leverage greater than 5.3 times, with a step-down to 600bp for less than or equal to 5.3 times. The OID was 97.5.
The US dollar tranche has a 0.75% floor while the euro tranche has a 0% floor.
Alongside the term loan in the debt package is a £300m-equivalent seven-year delayed draw senior term loan. Banks are typically not able to provide such products, which build in headroom for refinancing or future acquisitions. The extra firepower a DDTL offers has become an increasing consideration for sponsors if they are adopting a buy-and-build strategy for their buying target.
Other lenders in the deal were Canadian pension funds CDPQ and PSP Investments, CVC Credit, Guggenheim, Singaporean sovereign wealth fund GIC, KKR Credit and Permira Credit.
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