LBO Firms Are Going to Have to Share the Loan Pain
(Bloomberg Opinion) -- The leveraged loan and high-yield markets are recovering after their year-end dive – but it looks safe to assume that funding for buyouts is going to be harder this year than last. The private equity industry would be well advised to share the pain of their banks in getting the swelling inventory of leveraged loans off their balance sheets.
The latest deal to hit a wall is the $1.8 billion acquisition of ConvergeOne Holdings Inc. by CVC Capital Partners, Bloomberg News reported Tuesday. The buyout was agreed and financing secured in early November. Normally, banks are quick to get the loans off their balance sheets by selling them onto commercial lenders and specialist loan investors, freeing up capacity to move on to the next deal. But markets turned sharply in November – and Deutsche Bank AG is still sitting on the exposure.
There’s a price for everything, and Deutsche could presumably have shifted ConvergeOne’s loans at a loss in December if it had really wanted to go into 2019 with the deal off its books. After a generally good year in leveraged finance, the team involved could probably have afforded to swallow a dud. But their decision to sit tight has been vindicated by the recent bounce back in the leveraged loan market.
The financing package is nevertheless being tweaked. That probably means cutting the overall level of leverage being heaped on ConvergeOne, rejigging the mix of senior and junior tranches, or tightening the covenants. CVC will have to accept slightly less favorable terms than it initially hoped for, even if there was scope to adjust the details in the original agreement.
It makes commercial sense for everyone involved to get this deal away. The current recovery in financing markets has yet to be tested by a fresh LBO. If conditions are going to be tougher this year, it would be wise for CVC to spare Deutsche Bank too much pain. The time to make friends is before you need them.
The relationship between buyout firms and their lenders is symbiotic, and that will become more apparent as loan investors get pickier. The ConvergeOne financing isn't alone in squatting on a bank's balance sheet: last month Wells Fargo & Co. and Barclays Plc deferred the sale of a leveraged loan for a Blackstone Group LP deal. Rejigging these financings, perhaps with the sponsor taking some pain by contributing some extra equity, might be a good way of getting them moving.
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Chris Hughes is a Bloomberg Opinion columnist covering deals. He previously worked for Reuters Breakingviews, as well as the Financial Times and the Independent newspaper.
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