L.B.OMG: The deals that tested the buyout market in 2022

Investors inked a flurry of big-ticket leveraged buyouts this year, no mean feat in a dealmaking environment that tested big banks and private lenders alike.

Facing heightened uncertainty brought on by political risks and the Fed's hawkish rate hikes, Wall Street banks encountered twists and turns on their path to syndicate some of their debt commitments. Many were forced to keep billions of buyout debt on their balance sheets or take big losses if they chose to offload the debt at steep discounts.

At the same time, direct lenders encroached on the leveraged loan market and took on some of the risky—but also lucrative—pieces in the debt deal. As deteriorated credit conditions curbed banks' ability to finance buyout deals, private lenders seized the opportunities to fill the gap and have become an important source to help PE firms fund acquisitions.

Here is a rundown of four high-profile buyouts that captured the drama in LBO-land this year.   Twitter: $44 billion
In October, Elon Musk closed his $44 billion deal to acquire social media giant Twitter, ending a highly public dispute that nearly ended in a court battle.

Coming out of this deal, Twitter carries so much debt on its balance sheet that it faces an estimated $1.2 billion in annual interest payments, Bloomberg reported. That's a sharp increase from $51 million last year, according to an analysis of the company's financial statements in regulatory filings. Musk quickly embarked on a sweeping cost reduction campaign, which involved purging thousands of Twitter employees.

Musk's Twitter deal, the largest buyout of the year, has thrust the social media company into uncertainty. Twitter has experienced a wave of changes including the departure of several senior executives, the launch of a new subscription model, an exodus of advertisers, and a showdown with Apple.

Musk had lined up commitments of $46.5 billion to fund his proposed bid for Twitter, according to regulatory filings.

He also garnered equity commitments from investors including Oracle's co-founder Larry Ellison, Sequoia, VyCapital and crypto exchange Binance, which helped cut down his cash contribution to the deal. To fund his portion of the acquisition, Musk liquidated a good amount of his Tesla shares.

Debt financing also played a vital role in the leveraged buyout. A consortium of Wall Street banks, including Morgan Stanley, Bank of America and Barclays, committed to lend $13 billion to fund the deal.

Twitter's buyout debt, as revealed by an April regulatory filing, encompasses a $6.5 billion term loan, a $500 million revolver, $3 billion in secured bridge loans and $3 billion in unsecured bridge loans.

However, the deal soon left these bank lenders in pain.

Reports in October showed that these banks have had trouble finding buyers for the debt they took on to fund the Twitter buyout and faced hundreds of millions in losses if they chose to sell.

Instead, the lenders have held onto the debt, The Wall Street Journal reported. Other reports suggest that they had been courting hedge funds and other asset managers to offload the debt.

The saga is far from over. Bloomberg reported this week that bankers are now contemplating releasing some of Twitter's debt burden by replacing $3 billion of unsecured debt with a margin loan that Musk will be personally on the hook for.

Credit-rating agencies have expressed their concerns over the company's financial outlook. Both Moody's and S&P withdrew Twitter's credit grade, citing a “lack of sufficient information.” Citrix Systems: $16.5 billion
Perhaps more than any other LBO deals negotiated this year, Citrix came to exemplify the “hung debt” hanging around the necks of major banks.

The $16.5 billion take-private deal was announced at the end of January this year, following a flurry of M&A deal activities in a record 2021. The PE buyers—Vista Equity Partners and Evergreen Coast Capital—planned to combine Citrix with Vista's portfolio company Tibco Software.

Wall Street lenders including Bank of America, Credit Suisse Group and Goldman Sachs Group at the time committed to a roughly $14 billion debt package to support the buyout, which included a $7.05 billion term loan, a $1 billion revolver, a $4 billion secured bridge term loan and a $3.95 billion unsecured bridge term loan facility.

However, a few weeks after the deal was announced, Russia invaded Ukraine, and the Federal Reserve embarked on its inflation fight in March. Investor sentiment soured and financial markets fell, leading to a pullback from syndicated loans and high yield bonds.

Multiple reports in the second quarter showed that underwriting banks faced challenges to sell the debt backing the Citrix buyout to money managers and other investors.

Due to difficulties in syndicating Citrix's buyout debt, bankers had to consider restructuring the deal to trim losses, Bloomberg reported in July. They planned to cut the roughly $7 billion term loan into different tranches with varying risk and offer them to investors including CLO managers and mutual funds, as well as private credit lenders. Banks also kept a portion on their balance sheet.

In early September, as the underwriters finally offloaded $8.55 billion of loans and bonds backing the buyout at steep discounts, they reportedly lost several hundreds of millions of dollars combined. Athenahealth: $17 billion
In contrast with the Citrix deal, the Athenahealth acquisition might have epitomized how private equity firms seized favorable conditions to strike large-scale leveraged buyouts before the markets started going sideways. Within about three months following the November 2021 announcement, Bain Capital and Hellman & Friedman closed the $17 billion deal.

The Athenahealth deal was closed at a time when investors' appetite for leveraged loans remained strong as expectations of higher rates drove them to the floating-rate asset class.

The private equity firms financed the buyout through a $9.25 billion debt package provided by bank lenders. Part of the debt financing—$6.75 billion in loans—was priced tighter than preliminary price talk, suggesting the robust demand from buyers, according to LCD. The loans came to market at 350 basis points over the Secured Overnight Financing Rate, with a 0.5% floor and an original-issue discount of 99.5 cents. The Nielsen Company: $16 billion
The Nielsen buyout showed the rising presence of private credit funds in the leveraged loan market after the syndicated debt markets froze. Over the course of this year, PE firms have increasingly turned to these private lenders to fund large buyouts.

In March, a consortium of investors led by Evergreen Coast Capital, the PE arm of Elliott Management, and Brookfield Asset Management agreed to a $16 billion buyout of Nielsen Holdings. The deal was expected to close within the second half of this year.

Wall Street banks including Bank of America, Barclays and Credit Suisse Group originally committed to provide around $11 billion in debt financing for the buyout. However, they faced difficulties selling the debt as increased volatility roiled leveraged credit markets and sapped investor appetite for risky assets.

Private debt lenders stepped in and took down the unsecured portion of the debt financing, which is generally the hardest to sell to investors in an unfavorable market environment. A private credit consortium, led by Ares, committed to provide a second-lien term loan for the Nielsen buyout, replacing the $2.15 billion unsecured bridge facility in the original financing commitment.

While the move took some pressure off banks underwriting Nielsen's debt sale, there was still a big chunk of debt sitting on their balance sheet when the acquisition closed in October.

In November, as debt yields stabilized, underwriters took the chance to offload a portion of the debt to investors at a steep discount to face value.

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This article originally appeared on PitchBook News