Wall Street Banks Are Trying Everything in Fight for LBO Deals

Investment banks including Goldman Sachs Group Inc. and Barclays Plc are striving to get a lucrative fee-making machine back in action.

Traditional lenders are so keen to win leveraged buyout financing that some are pitching for subordinated debt deals — the riskiest type of underwriting which they mostly avoided during a bruising past few years. At least one bank is offering payment-in-kind options, which allow interest payments to be deferred, and others are talking to borrowers about so-called pre-capitalizations, which give companies financing before a deal has even gone on the block, according to people familiar with the matter.

Banks are hungry to win the generous fees from buyout deals after a period marked by having debt stuck on their balance sheets, which allowed direct lending powerhouses like Blackstone Inc. and Ares Management Corp. to beat them at their own game. Now, with broadly-syndicated loan and junk-bond markets roaring back, it’s easier for banks to sell on debt, and they’re often able to beat private lenders on price.

“There is a lot of appetite from the banks to underwrite,” said Giacomo Reali, high-yield partner at Linklaters LLP. “In situations where having junior debt in the structure makes sense, banks will want to be competitive and engage.”

Banks have already had a few big wins over private credit this year. Morgan Stanley and Goldman were able to poach nearly half of a $5 billion deal to refinance Ardonagh Group Ltd.’s debt from direct lenders. And JPMorgan Chase & Co. and Goldman Sachs won a deal to provide $5 billion in financing to help back KKR & Co.’s purchase of a stake in Cotiviti Inc.

Pricing being discussed on the floating-rate component of the Cotiviti deal is 3.5 percentage points over the Secured Overnight Financing Rate and a discounted price of 99.5 cents on the dollar. That’s significantly cheaper than the debt package private credit firms were said to be arranging in 2023 at a margin of around 5.25 to 5.5 percentage points over the benchmark.

“We expected there to be a swing back to the banks,” said Murad Khaled, head of EMEA leveraged finance capital markets at Bank of America Corp., adding that market dislocation in 2022 and 2023 made direct lenders instantly competitive. “As that dislocation has eased, we’re starting to see the historic delta in pricing between the two asset classes re-assert itself.”

Representatives for Goldman, Barclays and Morgan Stanley declined to comment.

Pre-Capitalizations

The quest to win fees is driving some banks, including Bank of America, to pitch pre-capitalizations to companies that aren’t even for sale yet, according to a person familiar with the matter. In these deals, lenders refinance a firm’s debt and add a portability clause, allowing a new buyer to keep the existing debt package in place. Bankers say it makes it easier for companies to be sold at a later date because the new owner doesn’t have to find financing.

A representative for BofA declined to comment.

With the M&A pipeline still relatively slow, banks are also keeping themselves busy by trying to poach back leveraged finance deals that were snapped up by direct lenders during more volatile times. They’ve had some success: the private equity owners of fertility treatment provider Ivirma Global, French insurance broker April Group and Italy’s Neopharmed Gentili SpA are all looking at refinancing in the syndicated market.

Read: Wall Street Tries to Lure Back Loans Lost to Private Credit

To sweeten some refinancing deals — and as a way to earn fees while dealmaking is slow — banks are pitching dividend recapitalizations to private equity firms. Dividend recaps allow sponsors to get payouts from their portfolio companies, and are another sign that investor appetite for all types of opportunistic debt are back.

Among recent examples, Apollo Global Management-owned Ingenico is marketing a €1.1 billion ($1.2 billion) term loan to refinance the French payment firm’s debt and give a payout to the private equity sponsor. And in the US, playground equipment company PlayCore Inc. sold a $1.1 billion leveraged loan to refinanceits $640 million first lien term loan and fund a dividend to its shareholder Court Square.

Still, refinancings are not where banks make the big money. In order for fees to pick up meaningfully, they need M&A to come back.

They’ll face stiffer competition from private credit firms, which are cutting prices to keep hold of deals. Blackstone Inc. recently sought a $250 million loan at a rate of around 4.75 percentage points over the US benchmark to finance its planned purchase of Rover Group, in what would be one of the cheapest private credit loans on record, according to data compiled by Bloomberg News.

Read: Private Credit Cuts Pricing to Fend Off Wall Street Deal Grab

“Longer term we’re going to see a lot more issuers mixing and matching,” said Daniel Rudnicki Schlumberger, head of EMEA leveraged finance at JPMorgan Chase & Co. “My expectation is that we’ll see direct lenders become the third leg of the stool alongside high-yield bonds and leveraged loans, with borrowers going back and forth between the different markets depending on liquidity needs and time.”

--With assistance from Hannah Benjamin-Cook.

To contact the reporters on this story:
Eleanor Duncan in London at eduncan42@bloomberg.net;
Michael Tobin in New York at mtobin37@bloomberg.net

To contact the editor responsible for this story:
Beth Mellor at bmellor@bloomberg.net

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