(Bloomberg) -- Blackstone Inc. is buying up a portion of a rare, junior-ranked loan in Europe’s leveraged finance market, as investors look to pick up riskier, higher-yielding debt amid falling interest rates.
The private equity firm is investing in a C$1.125 billion ($822 million) second lien tranche that is helping to finance AutoScout24’s purchase of Canadian online car marketplace Trader, according to two people familiar with the matter who weren’t authorized to speak publicly.
The second lien priced at 550 basis points above the Canadian risk free rate, the people said. The size of the Blackstone purchase is unclear.
Second-lien loans are a form of junior financing which usually have a lower-ranking claim on a company’s assets if it goes under, behind syndicated loans. Borrowers offer them because it allows their sponsors to limit the amount of equity they have to provide by increasing the leverage.
AutoScout24’s debt package comes in at around five times earnings at the senior level, rising to seven times with the second-lien component included, said a separate person familiar.
For private credit firms and other investors, the appeal is the price. Second-lien loans typically offer around two percentage points more in annual interest-rate costs than traditional first-lien debt, a particularly attractive option amid compressed spreads.
Spokespeople at Blackstone and owner Hellman & Friedman declined to comment. A representatives of AutoScout24 didn’t immediately respond to requests for comment.
Financing Alternatives
The leveraged finance market hasn’t seen many cash-paying second lien loans, which became too expensive for borrowers to offer after rates rose. Instead, private equity-backed firms have been turning to deeply-subordinated payment-in-kind loans offered by private credit firms in order to save cash. With a PIK, a PE firm can avoid paying any cash-interest — sometimes as long as until the loan term ends.
But bankers say that second-lien loans are now back, separate people familiar said, and they’re hoping to take market share for the instrument away from private credit firms. While AutoScout24’s second lien was placed directly with private firms, banks say that they have appetite to underwrite to syndicate second liens.
Still, the instrument is really only suitable for cash-generating businesses that can afford the higher interest costs, market participants say. And pre-placing second liens means that sponsors can cut the uncertainty associated with syndicating to a pool of investors.
AutoScout, owned by Hellman & Friedman, is also financing its purchase of Trader with a €2.4 billion-equivalent term loan B split between euros and dollars.
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