For example, last week, a club of direct lenders provided $3.7 billion of debt to fund the acquisition of software company Datto Holding Corp. while Anaplan Inc.’s buyout was backed with a $2.5 billion loan, also via a direct lending group.
Unique Structure
Unlike typical unitranches, Veracode and its debt have both been rated, making the transaction more accessible to a wider group of investors. Notably, its grades remained above the lowest rung of speculative-grade debt, which allows the biggest buyers of leveraged loans -- collateralized loan obligations -- to buy the deal.
The change ultimately saved roughly $1 million in interest expense per year for TA Associates as pricing converged, according to calculations by Bloomberg. The loan priced at 475 basis points over the Secured Overnight Financing Rate and a discounted price of 99.5 cents on the dollar, up from the 400 basis point margin originally discussed, due to the higher amount of debt at that level.
That’s significantly less than the second-lien portion, which had been discussed at a margin of 700 basis points over SOFR, the person added. It’s also much cheaper than the typical unitranche loan priced directly among private credit lenders, as those are in the range of 525 to 575 basis points.
Changing the structure did mean some investors couldn’t or no longer wanted to buy the unitranche loan, including some CLO funds, the person said. The deal lost roughly $500 million in demand with the change, but that still left the book significantly oversubscribed.
The company has an equity valuation of around 24 times, which meant there was still a substantial equity cushion below the debt, the person added.
Momentum
Veracode’s loan follows Sovos Compliance LLC’s financing completed in July, which had a leverage level of 7.25 times and priced at 450 basis points over the London interbank offered rate. The company is backed by sponsor Hg and has a minority stake from TA Associates, and the deal also blended first- and second-lien debt.
Last month saw Tank Holding sell a $1.7 billion unitranche at 600 basis points over SOFR. That offering was marketed to a larger group of investors than a typical private credit transaction, but was unrated.
Public unitranches may initially make some investors hesitant to participate, said Eric Wedel, partner at law firm Kirkland & Ellis LLP, but he expects the market to embrace the alternative financing once more deals are issued.
“There was an initial concern whether such deals can be sold to CLOs, but the momentum begins when one or two start to get done,” said Wedel.
This article was provided by Bloomberg News.