Buyout barons are finding inventive ways to capitalize on the legacy of cheap credit from the post-pandemic merger wave as interest rates rise. With the interest rate on high-yield loans doubling to 10% and private lenders charging about 12%, corporate matchmakers face challenges in refinancing old cheap loans with new expensive ones when borrowers change hands.
However, smart investors have identified potential loopholes in debt contracts that allow borrowers to retain their old loans even after a deal.
One option is obtaining a permit that allows a company’s management or long-time investors to assume responsibility for the debt, as exemplified by Clayton, Dubilier & Rice keeping Cornerstone Building Brands’ debt in place after a $5.8 billion deal. The buyout firm initially invested in the company in 2009.
Close scrutiny of fine print can reveal other ingenious options, like using specific definitions of change of control or attributing individual shareholders to avoid crossing ownership thresholds, according to Reuters.
Public companies also have “public-company exceptions” in debt contracts that enable them to retain debt during a change of control. This was seen in home automation provider Vivint Smart Home’s sale to NRG Energy, where the $2 billion debt was rolled over without triggering a forced refinancing.
In addition, taking out loans secured by assets that can be transferred to a new owner, as done by Blackstone during its takeover of QTS Realty Trust, allows for smoother transitions and continued financing.
While these credit tricks can be beneficial, they have limits. Serial acquirers will still require lender support for new acquisitions, and deal structuring antics can lead to legal complications.
Past cases, like Murray Energy’s 2015 deal with Foresight Energy, show the potential risks of attempting such maneuvers. Nevertheless, dealmakers will continue to explore ways to recycle old loans amid costlier new credit conditions. And, as mergers and acquisitions evolve, creative financing strategies offer opportunities to navigate the challenges of the current market.