CLOs Push Back on Funky Private Credit Tactics in Refinancings

2025-02-05 13:37:08.492 GMT

By: Eleanor Duncan and Kat Hidalgo (Bloomberg)

The biggest buyers of leveraged loans are welcoming the return of borrowers to the traditional loan market, but they aren’t embracing every aspect of private credit refinancing deals. Managers of collateralized loan obligations have been resisting some of the looser terms often associated with private credit, according to people familiar with the matter.

While lots of the big unitranche refinancings have already been snapped up by CLOs, there are smaller and lower-rated deals in the pipeline, and CLOs are getting hesitant about features like higher leverage and undrawn credit lines, the people said. “Not all unitranche deals have a route to the broadly syndicated market at this point in time,” said Andrew Lawson, head of capital markets at Permira Credit, responsible for credit trading and deal sourcing for the firm’s CLO platform. Higher-levered transactions will find it hard to refinance in the BSL market until companies show sustainable growth, he added.

CLOs are a crucial cog in the leveraged finance machine, and any signs of pushback may be a simmering risk for banks, which need these refinancings to go smoothly in order to get paid. And right now, these types of deals are especially important because bigger M&A-driven financings are few and far between. That’s left lenders on some of these transactions having to make tweaks to keep the CLOs happy. Among recent deals, IT company Questel wasn’t able to get all the provisions it wanted when it refinanced a loan in the broadly-syndicated market, according to a person familiar with the matter, who asked not to be named because the information is private.

Lenders nixed a so-called high-watermark Ebitda clause that would have allowed owners Eurazeo and IK Partners to use the highest level of Questel’s earnings to calculate dividends or to raise further debt, the person said. Banks also restricted the company’s ability to move assets out of the reach of creditors. Representatives for Eurazeo and IK Partners declined to comment. A representative for BNP Paribas SA, joint physical bookrunner on the deal along with Goldman Sachs Group Inc., declined to comment. Goldman Sachs didn’t immediately respond to a request for comment.

Irish service station operator Applegreen also had to make concessions on a recent €535 million ($557 million) unitranche refinancing — including removing a provision that would have allowed it to positively adjust its Ebitda to take into account future corporate actions, according to separate people familiar with the matter.

The soft call period that helps protect lenders from losses was increased to 12 months, they said. Representatives for HSBC Holdings Plc and Barclays Plc, the joint physical bookrunners on the deal, declined to comment. Applegreen did not respond to a request for comment.

Delayed Draw Term Loans

Other sticking points for borrowers trying to come to the broadly-syndicated market include undrawn credit lines and even the currency of the deals. UK infrastructure provider OCU Group Ltd sold the sterling portion of its unitranche refinancing back to private credit funds, according to people familiar with the deal. Sterling issues are typically a tough sell for CLOs because of the relatively small investor base of that market, while the addition of a delayed draw term loan, or DDTL, also put them off, the people said. OCU declined to comment. Representatives for global coordinators Bank of America Corp., Barclays and Morgan Stanley declined to comment.

DDTLs are a portion of undrawn debt available for making later acquisitions that have been a hallmark of private credit deals. But because CLO managers typically need to be paid interest immediately to make their economics work, they don’t like DDTLs, which usually have so-called ticking fees on the undrawn portion that can take a while to kick in. FNZ Group Ltd’s $2.1 billion unitranche refinancing in November is another case where things didn’t go completely smoothly. Banks including Barclays and Deutsche Bank AG ended up having to hold onto a chunk of the financial technology firm’s refinancing after failing to drum up enough interest in the euro tranche of the deal.

Lenders at the time said the market was healthy, and that FNZ’s struggles to refinance were credit-specific. Representatives for Barclays, Deutsche Bank and FNZ declined to comment. To be sure, pushback on terms is common as lenders and borrowers negotiate the finer points of deals. And as long as dealmaking remains slow, unitranche refinancings will still get done, because CLOs need to put the money they have raised to work.

Many such deals have gone smoothly, with Ardonagh Group Ltd. perhaps one of the biggest recent refinancing successes for banks. The UK insurance broker’s debt was snapped up because it was seen as a high-quality deal — and one which banks and direct lenders had fought hard over in the past.

Still, the broadly-syndicated market’s reticence to accommodate some elements of private credit loans may be a positive for direct lenders. With the leveraged finance market now able to offer better pricing, these extras are a crucial part of their fight to hold onto deals.

And things may shift as more of these refinancings happen and the quality of companies seeking to move their borrowings to the leveraged loan market deteriorates. “The low-hanging fruit of better credits have successfully printed,” said Floris Hovingh, head of EMEA debt advisory at Perella Weinberg. “We will likely also see more B- credits coming to market trying to deal with their maturities. They’re going to start trying their luck.”