Original Issue Discounts of > 10%
Wondering for MM PE deals in North America, what is the most OID that you've seen for unitranche? And under what cases? Pls advise. Thank you.
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Lowest i've seen is 93-94 range but that's upper MM. In most cases sponsors will be ok with higher yield vs OID as long as the math works. Most unis are clubbed up so you dont see OID dropping to 80's like in the underwritten syndicated world.
OID can drop to 80s in unitranche loans for pari incrementals with poorly worded MFN protections.
For 100p new issue, doesn't really go deeper than the 92, 93, 94 context due to lenders committing on their own books so incremental return can just come from increased coupon.
Thanks so much! I am trying to internalize this, have some experience in PE but not a lot.
By the first point, do you mean that for incremental debt raise if the basket clauses are loosely worded (meaning sponsor can take on more debt than ideal from the perspective of lender), the unitranche raised under the incremental capacity will be priced in the 80s?
What did you mean by this "For 100p new issue, doesn't really go deeper than the 92, 93, 94 context due to lenders committing on their own books so incremental return can just come from increased coupon". Why don't lenders want to go lower than 92/93/94? From their perspective why does it matter it if returns come from increased coupons (as opposed to OID?)
Citrix was what, 86? 88? Something like that.
Think Nielsen just priced Sr Sec at 91.
Tenneco will be low 90s. If Twitter went to market today I bet it'd be mid-80s.
Just saw you meant for MM deals. Obviously a different beast and private credit doesn't have flex / caps so per the poster above I imagine most yield will come in the form of increased coupon / rate.
Thank you, can you please elaborate on your last point, "Obviously a different beast and private credit doesn't have flex / caps so per the poster above I imagine most yield will come in the form of increased coupon / rate. "?
See below for a good explanation
The high OID in syndicated deals is because the banks committed with flex / caps that set a maximum on the interest rate charged to borrower (and a maximum OID that the borrower is on the hook for). The additional 7.5 points of OID say between 94 and 86.5 clearing level are covered by the underwriters.
In a private credit deal, there is no flex / caps concept, so the borrower / lenders just negotiate out the appropriate yield. From the borrower's perspective, they would generally trend away from high OID since a) it has to be funded with more equity at close and b) if they think they can refinance the higher spread loan in a year or two its probably more economical to pay the higher interest temporarily
Back when I was trading high yield credits, I looked at a sponsor-backed Israeli spyware company that got done at 90 in like 2019 - almost unheard of for an UMM broadly syndicated loan in that era, but doesn’t seem so outlandish these days.
Apparently Musk’s Twitter buyout is getting bid at 60 - we’ll see where it shakes out, but that has to be in the running for steepest discounts ever
It’s even worse than that. The 1L is being offered at 60 with the banks providing back leverage with no mark-to-market LTV test. Banks don’t even have a term sheet yet so don’t know what they bought despite the fact that it already funded. And that’s the 1L… can’t imagine what the junior tranches will go for.
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