March 21, 2023

KKR & Co.’s buyout of a French insurance broker is offering a window into the diminishing power of Wall Street’s vaunted leveraged finance machine.

The buyout firm agreed to fund on its own the totality of the €2.3 billion ($2.4 billion) purchase price for April Group, according to people familiar with the matter. Few banks are in much of a position to extend multibillion-dollar loans for acquisitions these days, given that they’re still saddled with more than $40 billion of unwanted buyout debt on their balance sheets.

This kind of all-cash buyout is almost unheard of in normal times, and yet it’s suddenly becoming commonplace in today’s market. The April Group purchase marks at least the fifth such deal in the past few months.

Private Equity Firm KKR Nears €2.3 Billion Deal for French Insurance Broker April Group

This could be just the beginning. Debt has become both more expensive and harder to come by, a consequence of rising interest rates that have created a backlog of hung deals and brought an abrupt halt to more than a decade of easy money, upending the world of debt-funded acquisitions.

“It is a factor of some banks backing away from doing private equity deals, not entirely, but doing less,” said Hilary Wiek, lead analyst for fund strategies at PitchBook.

KKR plans to put debt financing in place at a later stage when it could get more attractive terms, said the people, who asked not to be identified because the details are private. Yet it’s still a big change for a market that has been hooked on leverage for decades.

KKR itself has acknowledged that it’s getting harder to finance new deals.

“You may lean a bit more on the private credit market in this environment, maybe some portable capital structures. But we’re finding ways to get deals done,” the firm’s Co-Chief Executive Officer Scott Nuttall said on a Nov. 1 earnings call.

A representative for KKR declined to comment.

Drying Up

Capital-rich private credit funds, long-heralded as the savior of LBO financing, have been able to plug some of the hole left by banks’ retreat.

Blackstone Inc., for example, turned to private lenders to help fund its buyout of Emerson Electric Co. earlier this year after banks’ appetite soured. Several banks that had discussed financing the Emerson deal offered to participate only if they could underwrite the debt at around 85 cents on the dollar, an offer Blackstone promptly rejected, Bloomberg previously reported. Others who were more constructive were only willing to underwrite a small portion of the transaction.

But even direct lenders have cut back on new commitments.

Of course, the slowdown in buyout financing is partly by design, as central bankers around the world look to tap the brakes on growth in an effort to tame runaway inflation.

For some banks, their individual risk has also drawn scrutiny from regulators. In Europe, BNP Paribas SA and Deutsche Bank AG will soon face higher capital requirements by the European Central Bank, a sign that officials want banks to cut risk in the lucrative business of leveraged finance, Bloomberg reported.

KKR is now in talks with a number of bankers and private-credit funds about possible debt financings for April. The deal is expected to eventually be financed with around five-to-six times April’s approximate €150 million Ebitda, totaling up to €1 billion. The financing will also comprise a revolving credit facility.

–With assistance from Ruth David, Jan-Henrik Förster, David Watkins, Jill R. Shah and Natalie Harrison.

Copyright 2022 Bloomberg.

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