(Bloomberg) -- For the past few years, the booming industry known as private credit has been encroaching on big buyout financings that were once the exclusive domain of Wall Street’s elite banks.

Now, the banks are fighting back, and putting their own spin on a popular loan that’s been the tool of choice for private credit funds. 

A broadly syndicated leveraged loan for software-security provider Veracode Inc. is the latest to go down the so-called public unitranche route. Public unitranches have a structure similar to a type of loan used in private credit’s playbook, but are rarely seen in the syndicated loan market.

The Burlington, Massachusetts-based company earlier this month launched a $580 million first-lien loan to help fund its leveraged buyout by private equity firm TA Associates Management LP, and had separately placed a $235 million second-lien portion with a few private lenders, according to a person with knowledge of the matter. 

During the course of marketing, the first-lien component received more than $3 billion in demand, the person said, asking not to be named discussing a private transaction. That allowed the sponsor to drop the second-lien and combine it with the first-lien, creating a unitranche.

The tweak boosted leverage -- a key measure of debt to earnings -- to 7.75 times, Bloomberg previously reported, a level far more common in private credit, where 19% of deals had leverage of seven times or more in 2021, according to Proskauer Rose LLP. Most broadly syndicated deals, which are arranged by banks, try to stay at around six times or lower due to prior regulatory guidance. 

A representative for TA Associates declined to comment. A Veracode representative didn’t respond to a request for comment.

Avenue for Competition

This public unitranche structure creates a pathway for banks to compete with direct lenders, said Sandeep Desai, co-head of leveraged debt capital markets at Deutsche Bank AG, which led the Veracode transaction. “This is the idea that you can provide a one-stop solution for these high-quality companies that have massive valuations and low loan-to-values,” he said.

Desai plans to pitch these structures to clients going forward in the right situations. For example, companies in the technology, healthcare, and services sectors would likely be the best fit, he said. 

Unitranches have been the hallmark of the private credit world and players in that market have won deals using the structure to offer extra leverage compared with their banking counterparts, especially for software and technology companies. With the market at $1.2 trillion, according to data provider Preqin’s estimates, firms have been doing more multibillion dollar deals in order to deploy capital, which were unthinkable just a couple of years ago. 

For example, last week, a club of direct lenders provided $3.7 billion of debt to fund the acquisition of software company Datto Holding Corp. while Anaplan Inc.’s buyout was backed with a $2.5 billion loan, also via a direct lending group.

Unique Structure 

Unlike typical unitranches, Veracode and its debt have both been rated, making the transaction more accessible to a wider group of investors. Notably, its grades remained above the lowest rung of speculative-grade debt, which allows the biggest buyers of leveraged loans -- collateralized loan obligations -- to buy the deal. 

The change ultimately saved roughly $1 million in interest expense per year for TA Associates as pricing converged, according to calculations by Bloomberg. The loan priced at 475 basis points over the Secured Overnight Financing Rate and a discounted price of 99.5 cents on the dollar, up from the 400 basis point margin originally discussed, due to the higher amount of debt at that level. 

That’s significantly less than the second-lien portion, which had been discussed at a margin of 700 basis points over SOFR, the person added. It’s also much cheaper than the typical unitranche loan priced directly among private credit lenders, as those are in the range of 525 to 575 basis points. 

Changing the structure did mean some investors couldn’t or no longer wanted to buy the unitranche loan, including some CLO funds, the person said. The deal lost roughly $500 million in demand with the change, but that still left the book significantly oversubscribed.  

The company has an equity valuation of around 24 times, which meant there was still a substantial equity cushion below the debt, the person added.

Momentum

Veracode’s loan follows Sovos Compliance LLC’s financing completed in July, which had a leverage level of 7.25 times and priced at 450 basis points over the London interbank offered rate. The company is backed by sponsor Hg and has a minority stake from TA Associates, and the deal also blended first- and second-lien debt.

Last month saw Tank Holding sell a $1.7 billion unitranche at 600 basis points over SOFR. That offering was marketed to a larger group of investors than a typical private credit transaction, but was unrated. 

Public unitranches may initially make some investors hesitant to participate, said Eric Wedel, partner at law firm Kirkland & Ellis LLP, but he expects the market to embrace the alternative financing once more deals are issued.

“There was an initial concern whether such deals can be sold to CLOs, but the momentum begins when one or two start to get done,” said Wedel.

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