Private Credit Offers Payment-in-Kind to Win Medtronic Deal

Private credit funds competing with banks to finance Carlyle Group Inc.’s potential buyout of some units of Medtronic Plc have offered a partial payment-in-kind feature in an effort to win the deal, according to people with knowledge of the matter.

(Bloomberg) — Private credit funds competing with banks to finance Carlyle Group Inc.’s potential buyout of some units of Medtronic Plc have offered a partial payment-in-kind feature in an effort to win the deal, according to people with knowledge of the matter.

The private lenders are looking to provide a roughly $2.6 billion unitranche loan, which is a blend of senior and subordinated debt popular in the private credit world, according to people familiar with the matter. They are offering the option to PIK a portion of the interest expense, meaning it would be paid with more debt, said the people, who aren’t authorized to speak publicly.

Pricing is currently being discussed at 550 basis points over the Secured Overnight Financing Rate, SOFR, according to the people. Half of that spread would be eligible for PIK treatment, the people added. 

Representatives for Carlyle and Medtronic declined to comment. The financing details are still being negotiated, as is the acquisition. Both could change or not happen at all. 

The ability to offer PIK debt is an advantage for private credit funds as they compete with Wall Street banks to finance deals. It’s currently difficult for banks to raise such debt in the high-yield bond or leveraged loan markets, and private equity firms have increasingly tapped private lenders for PIK debt to soften their companies’ interest burden. With three-month SOFR at 5.4%, Medtronic is looking at paying nearly 11% in annual interest costs. 

Read more: Carlyle Seeks Roughly $2.5 Billion Debt for Medtronic Units Bid

Blackstone recently included a PIK component in the financing for the $3 billion merger of HealthComp Holding Company LLC and Virgin Pulse. Angelo Gordon & Co. and Oaktree Capital Management did the same when they refinanced a portion of Trinseo Plc’s debt with a PIK option. Carlyle previously snagged a $5.5 billion unitranche with a PIK component for its proposed purchase of Cotiviti, though that deal was ultimately abandoned. 

But private lenders can also be picky. Vista Equity Partners sought a sizable PIK-paying second-lien loan from private credit funds to refinance Finastra Group Holdings Ltd., but had to pony up $1 billion of preferred equity after encountering a chilly reception from lenders. 

(Adds benchmark yield of 5.4% in fifth paragraph.)

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