Apollo Global Management, once considered the bad boys of debt, isn’t the most egregious sponsor when it comes to over-the-top loan packages, according to a study from Xtract Research LLC.
Vista Equity Partners, Robert Smith’s buyout shop, is the most aggressive private equity firm when it comes to loan covenants, Xtract said. The New York research firm, a unit of Acuris, tracks the loans of more than 300 financial sponsors. To make its list of “Five Most Aggressive Sponsors by Covenant Score,” PE firms must have brought to market at least four loans over the past 18 months, said Charles Tricomi, head of leverage loan research at Xtract. The higher the score indicates the sponsor’s agreement is more protective of lenders, while a lower total indicates the loan is less protective.
Vista Equity, with a 2.2 score, emerged as the most aggressive sponsor, while Warburg Pincus came in second with 2.8, Xtract said. Hellman & Friedman placed third with 2.9, while Leonard Green & Partners ranked fourth with 3.4. Silver Lake placed fifth with 3.5. “Silver Lake was the least egregious of the five,” Tricomi said, who emphasized that only PE firms with at least four loans in the market over the past 1.5 years made the list.
Some of the most aggressive terms occurred when borrowers sold assets. Normally, borrowers use all the proceeds to pay off the company’s debt, Tricomi said. But in an “asset sale prepayment stepdown,” only part of the proceeds go to pay off debt. The rest is used to fund a dividend to the sponsor, Tricomi said. Xtract encountered this tactic in roughly 80 percent of Vista’s loans during the time period (January 2018 to now), he said. “In our view that’s a distorted sense of who owns the assets—it’s the borrower and not the sponsor. Why is the sponsor getting those proceeds?”
When Xtract expanded the list to include all sponsors with loans in the market, Vista dropped to second place with eight loans and a 2.2 score, he said. Jordan Co’s the Resolute Fund, with three loans, came in first with a score of 0.0. Blackstone, which had three loans, placed third with a 2.3 score, while Warburg slipped to fourth with four loans and 2.8. Hellman & Friedman rounded out the Top 5 with five loans and 2.9.
Surprisingly, Apollo Global, long considered one of the more aggressive buyout shops when it comes to debt, does not appear on either list. Other sponsors have surpassed Leon Black’s PE firm in using aggressive loan covenants, Tricomi said. Market participants “are talking more” about their loan terms, which allows other firms to adopt similar measures, Tricomi said. “Each time a new aggressive technique is introduced, everyone is aware of it and everyone wants to adopt it,” he said.
Will sponsors continue their aggressive ways if the U.S. economy goes into a recession? Absolutely, Tricomi said. He does expect some retrenchment if the long-awaited credit crunch arrives. “The pendulum has swung so far in borrowers’ favor, that it will unlikely swing back to where investors had the full suite of covenant protections,” he said.
Vista could not be reached for comment.
Action Item: For more information, contact Tricomi by emailing him at Charles.Tricomi@acuris.com.