(Bloomberg) — The buyout of Cotiviti Inc. is back, and this time banks including JPMorgan Chase & Co. have a good chance of leading the financing.
KKR & Co. is looking to buy a 50% stake in the healthcare data analytics company and plans to back its bid with about $5 billion to $6 billion of debt. It’s looking at options including getting private credit loans or more conventional leveraged financing from banks, according to people with knowledge of the matter.
Earlier this year, Carlyle Group Inc. tried to buy the same stake with a similar amount of debt, before abandoning the deal. Private credit firms were expected to win the financing in that case.
But now banks offering more widely held debt, including syndicated loans and junk bonds, look positioned to win the financing, said the people, who asked not to be named discussing a private transaction. Funding with syndicated loans and junk bonds is generally materially cheaper than private credit now.
In the loan market, pricing could be somewhere in the range of the Secured Overnight Financing Rate plus 4 to 5 percentage points, while in the private market that margin could be somewhere between 5.25 and 5.5 percentage points, the people said.
The shift is a sign of how much debt markets have recovered this year. Banks have offloaded most of the $40 billion of buyout debt that had been stuck on their books, giving them greater capacity to lead financings. And US leveraged loans have gained about 12% in 2023, while yields have dropped, as the Federal Reserve has signaled that it’s definitively stopped hiking and increasingly thinking about cutting rates.
“We’ve seen the broadly syndicated market come in pretty aggressively on pricing and terms, said Marc Chowrimootoo, managing director for private credit at Hayfin Capital Management, speaking about the market in general. “We don’t want to be chasing really hotly contested syndicated deals that hurt our return profile.”
KKR would be buying the stake from Veritas Capital, which took Cotiviti private in 2018. They haven’t agreed to any deal yet, and may never do so. The particulars of any financing are also still in flux. A spokesperson for KKR declined to comment.
Among the private credit lenders that are in talks to participate in the financing are Blackstone Inc., HPS Investment Partners, Blue Owl Capital Inc. and Goldman Sachs Group Inc.’s asset management arm, according to the people with knowledge of the matter. KKR is asking the private lenders to allow it to delay 100% of its interest payments, known as a payment-in-kind feature, to sweeten the financing for the company. For Carlyle’s deal, private lenders were only planning to allow half the interest to be delayed. Any bank financing is expected to require all of the interest be paid in cash.
“Both markets have their virtue,” said Leland Hart, a partner at Warwick Capital Partners who focuses on performing credit, without commenting specifically on Cotiviti. “But it makes sense to tap the syndicated markets now.”
KKR is only planning to value the stake at $10 billion to $11 billion including debt, compared with Carlyle’s abandoned offer of around $15 billion, Bloomberg previously reported. Meanwhile, the expected size of the debt is about the same for each of the deals. That means the newer deal will offer less equity cushioning to absorb losses for lenders.
But Cotiviti generates relatively stable income, which as long as it holds can make balance sheet metrics less important. Earnings before interest, taxes, depreciation, and amortization — a key measure of profitability — remains steady from earlier in the year at around $900 million, according to one of the people.
Representatives for JPMorgan, Blackstone, Blue Owl, Goldman Sachs and HPS declined to comment. Veritas and Cotiviti did not respond to requests for comment.
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