Investment banks including
Bank of America Corp.
Goldman Sachs Group Inc.
are on track to collectively lose more than $500 million on debt backing the largest U.S. leveraged buyout of the year after it was sold to investors at a steep discount.
The $4 billion in bonds backing the $16.5 billion take-private of
Citrix Systems Inc.
were auctioned off Tuesday at a 16% discount, netting around $500 million in losses alone for underwriting banks, according to people familiar with the matter and pricing term sheets viewed by The Wall Street Journal.
The banks additionally sold a $4.1 billion loan at a 9% discount to face value, with losses north of $100 million, the people said.
Vista Equity Partners and Elliott Management Corp.’s private-equity arm Evergreen Coast Capital struck the deal to buy Citrix in late January, before the selloff in stocks and bonds accelerated. In all, the transaction is to be funded with about $15 billion worth of debt.
The sale of the debt for the cloud-computing company has been closely watched by private-equity investors, who use leveraged loans and high-yield bonds to fund their deals, and the step discounts could further damp the outlook for buyout activity.
The firms have increasingly found the debt to be more expensive and harder to come by, making large buyouts more difficult to pull off. Private-equity deal activity has declined significantly this year as a result. As of Sept. 16, roughly $167 billion worth of leveraged buyouts were struck in the U.S. so far this year, as compared with about $259 billion in the same period of 2021, according to Dealogic.
The Citrix debt sale has been a long time coming, with the banks originally hoping to sell the whole lot before a market selloff this spring cooled investor interest. To get the deal across the finish line, the banks ultimately agreed to take on around $6 billion of debt themselves instead of trying to sell it to investors.
The underwriting banks also sweetened terms on the debt to be sold to investors, such as by adding stricter limits on what Citrix can do with cash if its earnings decline, according to investors who participated in the deal.
The difficulties in executing Citrix’s debt deal will likely make banks even more reluctant to underwrite large LBOs, investors said.
“Banks are in the moving business, not the storage business,” said Steven Hunter, chief executive at 9fin, a credit analytics platform. “They need to clear these deals in order to give them the capacity to underwrite new transactions.”
Both leveraged-loan and junk-bond markets have sold off this year as investors are increasingly worried about the economy slowing. New loan issuance dropped from $72.1 billion in January to a low of $6.34 billion in May, according to Leveraged Commentary & Data.
Companies have had to accept steeper discounts to sell high-yield debt this year. Sellers of newly issued buyout debt were receiving an average of 94.7 cents on the dollar as of Sept. 18, down from 99.2 cents in January, according to LCD.
To get deals done, private-equity firms have increasingly turned to private-credit providers such as
Blue Owl Capital Inc.
and Blackstone Credit, rather than banks. The firms don’t have to syndicate debt and can provide funding from investment vehicles established to do so.
The roughly $10 billion deal struck by Permira and Hellman & Friedman LLC to purchase software company
was supported by private credit, as was the agreed-upon take-private of tax software company
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