Private equity trio move closer to $ 15 billion debt for massive buyout

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Private equity groups Blackstone, Carlyle and Hellman & Friedman are expected to raise nearly $ 15 billion in debt Thursday in the bond and loan markets as they move closer to funding the largest debt buyout since the 2008 crash .

The heavy debt issuance will go to the buyout groups’ acquisition of a controlling $ 34 billion stake in family-owned Medline, one of the largest manufacturers of medical supplies in the United States.

Investors recovered the debt, ignoring the high leverage and low commitments that underpin the deal and instead highlighting the strength of the underlying activity, especially after the pandemic added to demand for products such as face masks.

Debt holders also pointed out that the Illinois-based company – which was founded in 1966 by brothers Jim and John Mills – was to remain in the family and still be run by the founders’ respective sons, Charlie and Andy.

The Mills family retains equity in Medline worth $ 3.5 billion while the buyout groups issued a check for $ 13 billion to supplement the increase in exceptional debt.

The fundraiser underscores the fierce pace of transactions so far this year, helped by widely open capital markets, with private equity groups taking advantage of investor demand to help them acquire companies at high valuations in using cheap debt.

“The environment couldn’t be better for borrowers, but it generates a lot of old-fashioned aggression,” said Christina Padgett, head of leverage finance research and analysis at Moody’s. “Some things are reminiscent of 2007.”

Buyout groups have landed more than 10,000 buyouts so far this year, a record number, according to data provider Refinitiv. The value of transactions, at more than $ 800 billion, has already greatly exceeded the all-time high of 2007.

The exceptional debt deal will leave Medline with a high debt-to-earnings ratio of around seven times, according to rating agencies S&P Global and Moody’s. This will cause the overall rating of the issuer to drop to a level B.

Analysts at the Covenant Review research group also pointed to some weak investor protections in the deal documents. In particular, the company can take on debt for an additional $ 16.5 billion, or even more if certain financial ratio tests are met.

Rising Medline Debt

  • Medline’s syndicated debt is divided into four parts, with the exact allocations between the various tranches still being decided, according to people familiar with the transaction.

  • A euro-denominated loan equivalent to $ 500 million, which is expected to be priced at Euribor plus 3.5 percentage points.

  • At least one $ 6.5 billion dollar-denominated loan, which is expected to be priced at Libor plus 3.25 percentage points, down from previous talks by 3.5 to 3.75 points due to the strong demand from investors.

  • At least a $ 4.5 billion bond secured on the company’s assets, which is expected to be priced below 4%, against an average yield of around 4.3% for similarly rated covered bonds already on the market, according to an index managed by Ice Data Services.

  • $ 2.5 billion in unsecured debt, which is priced Thursday with a coupon of between 5.25% and 5.5%, after falling about 6% when the deal was first marketed times from investors.

  • $ 1.5 billion taken from the original unsecured bond amount and is expected to be reallocated roughly equally between the secured bond and the US loan.

  • JPMorgan and Goldman Sachs led a large group of banks syndicating the bond deal with investors, with Bank of America leading the loan. The banks all declined to comment.

Nonetheless, investors remained bullish on the deal. “The quality of this company, the turnover of family stocks, the continuity of the family management and the overall size of the equity investment are enough to make up for the negatives,” said Bill Zox, portfolio manager at Brandywine Global Investment Management. .

Blackstone declined to comment. Medline, Carlyle and Hellman & Friedman did not respond to a request for comment on the transaction.

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