Aug 5, 2021 - Economy & Business

Big debt waters tested by Medline buyout

Illustration of dollar bills on a bridge.

Illustration: Aïda Amer/Axios

The largest LBO financing since the financial crisis is coming to a debt market near you. A bevy of banks made their initial pitch this week to sell investors part of a $15 billion loan backing the $34 billion buyout of medical supplies company Medline Industries.

What's new: A banking group led by JPMorgan and Goldman Sachs asked a select group of high yield fund managers to buy a piece of the Medline debt commitment known as a "bridge loan," sources tell Axios. Investors were asked to make their decisions by Wednesday.

Why it matters: How things go with Medline will signal whether private equity sponsors can even pull off the kinds of massive deals that were more common prior to the financial crisis — since a large debt raise can be daunting and is one factor that can limit deal sizes.

  • And for the banks, offloading the commitments to investors helps them pare back the risk on their balance sheets and free up capacity to commit to even more deals in the LBO pipeline.

How it works: Banks don't always bother syndicating bridge exposure — but they almost always do for the larger deals.

  • The bridge exposure isn't funded debt — it's just a commitment to fund if needed — and the banks pay investors a fee for their trouble.

Between the lines: Bridge loans are temporary and will later be replaced with a permanent financing.

  • The success or failure of a bridge syndication offers the first clues as to what debt investors think of the deal. That's important, because if not enough investors buy into the permanent financing down the road, then the debt gets stuck on the banks' balance sheets.

The verdict? Medline — which is selling a majority stake to Blackstone, Carlyle and Hellman & Friedman — fits the bill of appealing to a wide audience of credit investors. It's a non-cyclical business with a reasonable amount of post-LBO debt relative to its earnings.

  • The banks are likely to launch syndication for the company's actual funded debt financing — $10.8 billion in secured debt and $4 billion in unsecured bonds — in September.

The bottom line: Private equity fundraising is on pace for a record year, according to PitchBook. Sponsors may face any number of challenges deploying the mountain of dry powder to gigantic deals — for now the debt market isn't one of them.

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