For the past few years, the booming industry known as private credit has been encroaching on big buyout financings that were once the exclusive domain of Wall Street’s elite banks.
Now, the banks are fighting back, and putting their own spin on a popular loan that’s been the tool of choice for private credit funds.
A broadly syndicated leveraged loan for software-security provider Veracode Inc. is the latest to go down the so-called public unitranche route. Public unitranches have a structure similar to a type of loan used in private credit’s playbook, but are rarely seen in the syndicated loan market.
The Burlington, Massachusetts-based company earlier this month launched a $580 million first-lien loan to help fund its leveraged buyout by private equity firm TA Associates Management LP, and had separately placed a $235 million second-lien portion with a few private lenders, according to a person with knowledge of the matter.
During the course of marketing, the first-lien component received more than $3 billion in demand, the person said, asking not to be named discussing a private transaction. That allowed the sponsor to drop the second-lien and combine it with the first-lien, creating a unitranche.
The tweak boosted leverage -- a key measure of debt to earnings -- to 7.75 times, Bloomberg previously reported, a level far more common in private credit, where 19% of deals had leverage of seven times or more in 2021, according to Proskauer Rose LLP. Most broadly syndicated deals, which are arranged by banks, try to stay at around six times or lower due to prior regulatory guidance.
A representative for TA Associates declined to comment. A Veracode representative didn’t respond to a request for comment.
Avenue For Competition
This public unitranche structure creates a pathway for banks to compete with direct lenders, said Sandeep Desai, co-head of leveraged debt capital markets at Deutsche Bank AG, which led the Veracode transaction. “This is the idea that you can provide a one-stop solution for these high-quality companies that have massive valuations and low loan-to-values,” he said.
Desai plans to pitch these structures to clients going forward in the right situations. For example, companies in the technology, healthcare, and services sectors would likely be the best fit, he said.
Unitranches have been the hallmark of the private credit world and players in that market have won deals using the structure to offer extra leverage compared with their banking counterparts, especially for software and technology companies. With the market at $1.2 trillion, according to data provider Preqin’s estimates, firms have been doing more multibillion dollar deals in order to deploy capital, which were unthinkable just a couple of years ago.