Leveraged finance bankers have hit back against efforts by a private equity firm to limit transfer of loan assets to hedge funds. A recent credit agreement for a proposed CVC deal would have curbed sale of the debt to hedge funds, a leveraged finance source said. Lenders demanded higher loan pricing in recompense, but the issue became moot when the bid failed.
However, the case further highlighted the role of hedge funds in debt syndicates. Some private equity firms are uncomfortable with these lenders, saying they do not know how the hedge funds will behave when the leveraged finance bubble bursts. Others are more accepting of hedge funds because the liquidity they provide makes for cheaper financing.
The debt package for CVC’s buyout last year of the Automobile Association already carries a prohibitive lender clause. Other deals contain similar mechanisms, and certain private equity firms are stepping up pressure on underwriting banks to enforce such features going forward.
Permira rejected chatter in the market suggesting that it too was in favour of a crackdown. A spokeswoman said that the firm recognised hedge funds as significant players in the debt markets and that they featured in debt syndicates for its portfolio companies.
“It would be irrational to exclude a whole class of investors. We are selective about lenders to investee companies; we are looking for long-term investors from entry to exit and we make decisions about individual investors on that basis,” she said.