In the private market where the world’s largest leveraged buyouts are funded, borrowers get to decide who buys their debt. Recently they’ve discovered they can’t be too choosy.
(Bloomberg) — In the private market where the world’s largest leveraged buyouts are funded, borrowers get to decide who buys their debt. Recently they’ve discovered they can’t be too choosy.
Hedge funds, a group of investors once deemed too opportunistic, are starting to crop up on “white lists” of approved lenders that private equity firms have used to control who they borrow from since the financial crisis. Even the most restrictive firms like KKR & Co. are revising lists to accept certain funds.
Former Credit Suisse Group AG star trader Hamza Lemssouguer is among those benefitting from the new leniency. His Arini fund broke into the ranks of approved lenders using a collateralized loan division it just set up, according to people with knowledge of the matter who couldn’t be identified because details are private. Cross Ocean Partners and Sona Asset Management Ltd. are taking similar routes.
Borrowers, and the private-equity firms who control them, began drawing up lists of investors they’re willing to do business with in the wake of the 2009 financial crisis. It was a way to shield their firms from predatory funds and opportunists who use “loan-to-own” strategies to push companies into bankruptcy, rather than keep refinancing until a company’s prospects improve.
Read: There’s a Blacklist That Rules $800 Billion U.S. Loan Market
These days, hedge funds are seen as more friend than foe, as everyone in the market looks for ways to revive dealmaking that sputtered as rates rose and buyers fled, leaving tens of billions of dollars of unsold debt stranded on bank balance sheets.
In the past, “companies that were otherwise performing may have been more vulnerable to nuisance and rent-seeking from opportunistic buyers in secondary,” said Edward Eyerman, head of European leveraged finance at Fitch Ratings. “But now we’re getting to a point where it looks like everything is about sponsor optionality.”
CLO units of hedge funds are more likely to keep lending to a stressed borrower through an economic downturn. That’s because CLOs, investors that form the backbone of the leveraged loan market, typically seek to hold debt for as long as its outstanding.
KKR Opens Door
That’s softening the resolve of firms known for their hard stances. KKR relaxed its criteria to allow hedge funds into one of the largest refinancings in Europe this year for Dutch food company Upfield Holdings BV, according to people familiar with the matter, who aren’t authorized to speak publicly. In the past it had barred prospective investors from lending to Upfield.
Even pure hedge funds are gaining entry to the club. Elliott Investment Management LP was an anchor investor to CVC for €1.5 billion ($1.6 billion) of loans to finance the buyout of tea business Ekaterra. CVC controls its lender group by granting consent to individual firms, rather than through lists of approved lenders.
Spokespeople at Arini, Sona, Cross Ocean declined to comment as did KKR, CVC and Elliott.
The US market has its own form of blacklisting that bar specific funds.
These are actually less restrictive than white lists, because they give private-equity firms and lenders freedom to tap a larger pool of buyers.
That’s important when buyers drop out of a refinancing or debt extension. US-style restrictions also provide more exit routes in a liquidity crunch.
The problems with white lists became all too obvious last year when Australian health care provider GenesisCare’s debt turned distressed. A white list meant existing lenders who couldn’t hold onto loans trading at distressed levels were also unable to sell them to funds that wanted them.
“At a high level it’s helpful because it improves the secondary market liquidity by allowing more borrowers into the syndicate,” said Tyler Wallace, a portfolio manager at Fair Oaks Capital Ltd., who is responsible for Fair Oaks’ European CLOs.
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