The private equity groups Blackstone, Carlyle and Hellman & Friedman are set to raise almost $15bn of debt on Thursday across bond and loan markets as they close in on financing the largest leveraged buyout since the 2008 crash.
The hefty debt issuance will go towards the buyout groups’ $34bn acquisition of a majority stake in family-owned Medline, one of the largest medical supply manufacturers in the US.
Investors have snapped up the debt, shrugging off the high leverage and weak covenants underpinning the deal and instead pointing to the strength of the underlying business, particularly after the pandemic added to demand for products such as face masks.
Debt holders also pointed to the fact that the Illinois-based company — which was founded in 1966 by brothers Jim and John Mills — was expected to stay in the family and still be run by the founders’ respective sons, Charlie and Andy.
The Mills family is retaining equity in Medline worth $3.5bn while the buyout groups have written a $13bn equity cheque to supplement the bumper debt raising.
The fundraising underscores the ferocious pace of dealmaking so far this year, aided by wide-open capital markets, with private equity groups taking advantage of investor demand to help them acquire companies at elevated valuations using cheap debt.
“The environment could not be better for borrowers but it is generating a lot of old school aggression,” said Christina Padgett, head of leveraged finance research and analytics at Moody’s. “Some of it feels reminiscent of 2007.”
Buyout groups have clinched more than 10,000 takeovers so far this year, a record number, according to the data provider Refinitiv. The value of the deals, at more than $800bn, has already far surpassed the all-time high set in 2007.
The bumper 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. That will drag down the overall issuer rating to a B level.
Analysts at the research group Covenant Review also highlighted some weak investor protections in the deal documents. In particular, the company can take on $16.5bn in additional debt, and even more if certain financial ratio tests are met.
The Medline debt raise
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Medline’s syndicated debt is divided into four parts, with the exact splits across the different tranches still being decided, according to people familiar with the transaction.
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A $500m equivalent euro-denominated loan, expected to price at Euribor plus 3.5 percentage points.
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At least a $6.5bn dollar-denominated loan, expected to price at Libor plus 3.25 percentage points, down from earlier talk of 3.5-3.75 points off the back of strong investor demand.
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At least a $4.5bn bond secured against the company’s assets, expected to price with a coupon below 4 per cent, compared to an average yield of about 4.3 per cent for similarly rated secured bonds already in the market, according to an index run by Ice Data Services.
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$2.5bn of unsecured debt, set to price on Thursday with a coupon between 5.25 per cent and 5.5 per cent, having dropped from about 6 per cent when the deal was first marketed to investors.
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$1.5bn taken from the initial amount for the unsecured bonds and expected to be roughly evenly reallocated between the secured bond and US loan.
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JPMorgan and Goldman Sachs led a large group of banks syndicating the bond deal to 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 business, the family equity rollover, family management continuity and overall size of the equity investment are enough to offset the negatives,” said Bill Zox, a 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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