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Goldman to be educated on Cov-Lite appetite
The leveraged buyout of Laureate Education closed before the credit crunch could scuttle it. Unfortunately for Goldman Sachs and other members of an underwriting group, the hard part may be just beginning.
A Goldman Sachs-led group is attempting to syndicate $775 million in covenant-lite term loans for Laureate Education, sources told Reuters Loan Pricing Corp on Monday.
Covenant-lite you say? Yes, that covenant-lite. These are the loans with few to no restrictions that debt investors have all but turned their backs on. Restriction-free loans used to be the rage, and debt investors couldn’t get enough of them during the LBO frenzy. But debt investors got spooked by the subprime mortgage mess, and Cov-lite, as it became known, went the way of the dinosaur (at least for now), right there with its pal Pik-Toggle.
Since the Laureate deal has already been funded, the underwriters would not be able to increase the spread to Libor — the London interbank rates whose recent gyrations have been another symptom of credit jitters – to make it more attractive. The only tool available to sell the deal would be to sell at a discount to par. The banks funded the term loan at a spread of 325 basis points over Libor
The Laureate LBO was closed last month and since then has been fully funded by the underwriters. The financing includes a $400 million revolving credit line and more than $1 billion in senior unsecured and subordinated debt. The banks are not planning to syndicate the revolver or the subordinated debt, according to Reuters LPC.
Now Goldman is left to try and sell down the loans to a less forgiving crowd. Laureate was bought earlier this year for $3.82 billion by an investor group led by the company’s chairman and chief executive, Douglas Becker. The buyout group, which featured private equity giant Kohlberg Kravis Roberts & Co. and high powered hedge fund SAC Capital, is putting in nearly $2.2 billion in equity.
The investor group also includes Citigroup Private Equity, SPG Partners, Bregal Investments, Caisse de depot et placement du Quebec, Sterling Capital, Makena Capital, Torreal S.A. and Southern Cross Capital.
Goldman is also grappling with funding another mid-sized buyout, that of chemicals company Myers Industries Inc. The company said on Monday that its proposed buyout by GS Capital Partners, Goldman’s private equity arm, was postponed until the fourth quarter due to financing conditions.
The $778 million deal, which was signed in April, becomes the credit crunch’s latest LBO casualty.
Reuters Loan Pricing Corp. reported at the end of July that GS Capital Partners had postponed until later this year the $950 million financing needed for the deal, which is worth $1.07 billion including debt. GS Capital Partners had also agreed to concessions on the debt, adding the financial targets that investors are demanding, RLPC reported.
(With reporting by Faris Khan at Reuters Loan Pricing Corp.)