Sep 26, 2022 - Economy & Business

Private equity's new debt ceiling

Illustration of a dollar-shaped weight causing cracks in the ground

Illustration: Sarah Grillo/Axios

Private equity anxiety is peaking over a debt ceiling that has nothing to do with Congress and everything to do with Citrix.

Driving the news: Banks last week lost between $600 million and $700 million, after they were forced to discount junk bonds tied to the $16.5 billion acquisition of Citrix by Elliott Management and Vista Equity Partners.

  • And that doesn't account for the $6 billion+ of debt that the banks were unable to sell, even after Elliott itself helped plug part of the demand hole with a $1 billion bond purchase.
  • In short, prospective buyers fear that rising rates will vacuum up Citrix's cash flow.

The big picture: Corporate acquirers already were struggling to get Wall Street underwriting for leveraged buyouts, particularly the larger ones that are beyond the reach of most private credit funds. Now, the situation is deteriorating even further.

  • Citrix is an outlier in terms of size, as it's the year's largest corporate junk bond issue, but banks have plenty of other outstanding LBO loans on their books.
  • Examples include Lumen Technologies (ILEC assets), Nielsen, Tegna, Tenneco and (in theory) Twitter.
  • Some of those debt packages may prove easier to sell than was Citrix, but there are no guarantees, and banks are unlikely to keep diving when they're worried about being pushed further underwater.

The bottom line: Private equity is sitting on record amounts of dry powder, at a time when stock market declines have created new acquisition targets. But there's no LBO party if Wall Street won't RSVP.

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