Investors queued for a piece of one of the largest leveraged loans of the year this week, in a deal that confirmed a revival of the $1.2tn funding market after a grim fourth quarter.
The multibillion-dollar borrowing by electronic health record provider Athenahealth had been heavily scrutinised by private equity executives and investors alike as a sign of the wider appetite for riskier leveraged buyouts after last year’s sell-off.
Bankers led by JPMorgan Chase finalised a two-part loan to Athenahealth worth roughly $4.5bn late on Thursday, but at a higher interest rate than similar blockbuster deals last year. The deal comes after a string of other private equity takeovers have tested the leveraged loan and high-yield bond markets to varying levels of success, including multibillion-dollar deals that funded the buyouts of data analytics group Dun & Bradstreet and jet maintenance provider StandardAero.
“What you are seeing now are transactions that are still pushing the envelope in terms of aggressive structuring and leverage profiles, but investors are getting better paid for it,” said Steven Oh, the global head of credit and fixed income at PineBridge Investments.
Portfolio managers have been tempted to invest in the new deals in the wake of a rally in leveraged loan prices and higher yields on the newly issued borrowings. While concerns over the durability of the US economic expansion continue to dog financial markets, fears of a recession in the coming months have been tempered since late last year.
That has helped provide some stability to the leveraged loan market, which has overtaken the $1.2tn high-yield bond market as the critical source of funding for private equity groups seeking to finance their buyouts.
“We feel the rebound is sustainable,” said Ron Launsbach, a portfolio manager with Columbia Threadneedle Investments. “The economy is doing well and we think the fundamentals are intact.”
The turmoil last year raised questions over how private equity firms would finance takeovers, as Wall Street banks refused to lend at the same interest rates they had just months earlier. For a time, several transactions hung in the balance, including the planned $15bn takeover of US manufacturer Arconic by Apollo. That deal ultimately collapsed for unrelated reasons.
Banks and investors are willing to back deals today, financial advisers said, but they have become choosier. GameStop, a Texas-based video game retailer, called off a sale because a would-be buyer of the company could not secure financing. Separately, USA Today owner Gannett has raised questions over whether a hostile takeover bid it received could feasibly be financed.
To fund their $5.7bn takeover of Athenahealth, private equity firm Veritas Capital and hedge fund Elliott Management paid a premium to secure financing compared with a large buyout like the $17.5bn purchase of Thomson Reuters’ financial terminal business in 2018. The $3.7bn seven-year term loan for Athenahealth yielded 450 basis points over Libor, according to people with knowledge of the deal. By contrast the Thomson Reuters unit, now known as Refinitiv, locked in its $6.5bn seven-year term loan at 375 basis points over Libor.
But demand for the Athenahealth loan was “healthy”, one person with knowledge of the transaction said, allowing bankers to set the yield at the low end of their expectations. The deal had initially been marketed to investors with a yield between 450 and 475 basis points over Libor. The company also borrowed $800m through a second-lien loan to fund the transaction, which sources said was arranged privately.
“Markets have repriced and demand has stabilised so there’s more confidence in underwriting and more confidence from an investor perspective,” said Art de Peña, the head of loan distribution at MUFG Securities.
