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Investors devour risky corporate debt in boost to LBO business

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The market for debt that funds corporate buyouts is opening up after a months-long freeze, with investors again vying for billions of dollars in risky bonds or loans offered for sale this week.

The strength of demand will embolden private equity executives whose business has been largely on ice since the Federal Reserve began raising interest rates in 2022. The Fed this week refrained from another rate rise, suggesting that the cost of financing takeovers may soon level off.

Rising interest rates left the banks that finance leveraged buyouts (LBO) stuck with loans that they could not sell. But after having unloaded billions in such “hung loans,” many are eager to lend again.

“There’s clearly a hunger for new supply in high-yield,” said Andrzej Skiba, head of US fixed income at RBC Global Asset Management.

Two sales this week signalled a shift. Investors clamoured for junk bonds and loans backing private equity groups’ acquisitions of financial technology company Worldpay and healthcare company Syneos Health.

Demand to fund GTCR’s majority takeover of Worldpay was so strong — investors placed more than $20bn of orders for the debt — that the company was able to increase the amount it borrowed in bond and loan markets, ultimately raising $8.65bn, according to three people involved in the transaction.

Worldpay increased the size of a term loan twice, from $3.4bn to $5bn and then to $5.2bn. It locked in borrowing costs 3 percentage points above benchmark interest rates instead of an expected 3.75 percentage-point spread. The company ultimately reduced the size of a euro-denominated loan, given the robust demand in the US.

GTCR used the extra debt to reduce the amount of equity it had to invest by $250mn, pumping $5.2bn into the company as opposed to the $5.4bn it initially intended, according to people briefed on the deal. GTCR declined to comment.

Banks underwriting $3.7bn of loans and bonds to fund the buyout of healthcare company Syneos Health by Elliott Management, Veritas Capital and Patient Square Capital, also received strong demand. That allowed it to reduce the interest rate on its $2.7bn loan by 0.5 percentage points.

The demand for the deals will give private equity executives more confidence that investors are willing to finance new buyouts after a fallow 12 months, as well as boost Wall Street bankers’ willingness to provide bridge loans to the LBO industry.

Investors have been choosy, however, seeking out companies they believe can weather higher borrowing costs. Companies with double B or B plus debt ratings have received solid demand, while lower-rated single B and triple C rated companies have been forced to go to private credit lenders for financing.

“Banks are nervous to underwrite single-B credit with M&A timelines which could be six months of holding the risk,” said Lauren Basmadjian, co-head of liquid credit at Carlyle. “We haven’t seen a very large single-B leveraged buyout tested in our market but . . . I think there’s demand for it.”

Investors have had limited bond and loan financings to entertain this year. The volume of buyouts — which have traditionally fuelled junk debt markets — has more than halved, with $418bn in deal volumes in the first half of 2023, compared with $1tn in the first half of 2022, according to PitchBook.

This article has been updated to add details on the size of Worldpay’s term loan

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