Private lenders step in to salvage distressed government bond deals

Private lenders including Apollo and Ares have been stepping in to prop up corporate bond deals in public markets as other investors pull back amid volatility that has crushed the volume of riskier debt sales this year.

Ares Management provided $2 billion of the debt to back Brookfield and Elliott Investment’s $16 billion purchase of consumer data company Nielsen Holdings in April, after plans to go entirely into the government bond market fell through. , according to people familiar with the deal.

Brookfield is also borrowing nearly $900 million from Goldman Sachs Asset Management’s private credit arm for its acquisition of software company CDK Global for about $8 billion, according to people briefed on that transaction.

The uptick in so-called hybrid deals, in which funding comes from public and private markets, comes as more traditional asset managers have become more cautious about buying corporate bonds. These money managers are seeing huge withdrawals from their funds as investors respond to the Federal Reserve’s goal of tightening financial conditions by withdrawing their cash.

Falling demand has contributed to a cooldown in high-yield bond issuance this year, leaving an opportunity for private lenders to step in and provide cash on terms less contingent on short-term price fluctuations.

The flurry of deals also underscores the growing power of private lenders, which are often units of buyout groups and alternative money managers. Its assets have risen to around $1.2 trillion after growing at a double-digit annual rate for the past decade, according to data provider Preqin, as investors poured capital into funds in search of yield.

The Nielsen and CDK deals come after Apollo saved an excellent debt offer from Carvana, the online car dealer, last month. The private lender proposed a modified deal, committing nearly half of the $3.28 billion raised by the company after its original, smaller bond offering struggled to attract investor demand.

“When the high yield market closes. . . private markets have to come for support,” said Kipp deVeer, who runs Ares Credit Group. “We benefit from volatility because we can step in and work with companies that we like.”

The shift is most evident in large leveraged buyouts and deals for technology companies with valuations based on rapid growth, which have come under pressure as the Fed began to raise rates.

Private lenders say they are better positioned to step in and provide financing while markets remain choppy because the capital they have to put to work is locked up and cannot be withdrawn as quickly as it can from typical mutual funds.

Although private lenders tend to charge higher interest rates than corporate borrowers would normally pay bondholders, they say they offer companies the chance to secure funds with certainty in volatile markets.

“For private credit, it’s a fantastic opportunity to deploy capital quickly,” said John McClain, manager of high-yield bonds at Brandywine Global.

Some of the businesses that private lenders are financing are struggling, McClain added, meaning their creditors “will be sweating for a while.” But he said the private credit funds’ long lock-in structure meant they would have “time to work out the problems”.

The number of new private debt funds raising cash has fallen from the breakneck pace seen over the past year. But the average amount raised by each new fund more than doubled in the first quarter of this year compared to the same period in 2021, according to data provider Preqin, in a sign of the growing firepower some funds can deploy. .

Elon Musk’s potential acquisition of Twitter could be added to the list of hybrid deals, with financing expected to come from a mix of syndicated debt and private lenders.

Apollo is also working with bankers to provide a portion of the debt for Vista Equity Partners and Evergreen Coast Capital’s $16.5 billion acquisition of Citrix Systems, according to people familiar with the deal.

“Market depth just doesn’t exist right now for these big financings,” Zito said. “Companies and banks are starting to look at hybrid solutions between public and private lenders. You need access to all parts of the market to get these big deals done.”

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