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By Jonathan Schwarzberg
NEW YORK, Oct 12 (LPC) - KKR Capital Markets is arranging a leveraged financing that will back the US$6.7bn sale of one of its portfolio companies, insurance services provider Sedgwick, as private equity firms continue to boost their lending capabilities.
KKR is playing dual roles on Sedgwick’s sale as it is acting as the seller and is one of three loan arrangers along with Bank of America Merrill Lynch and Morgan Stanley. KKR agreed to sell a majority stake in Sedgwick to Carlyle in September and is selling all of its interest in the company.
BAML provided the staple financing and is teaming up with KKR to provide the majority of the underwriting commitment. Morgan Stanley has a smaller underwriting role, bankers said.
The financing for Sedgwick’s sale, which is one of KKR’s biggest to date, is expected to launch in the fourth quarter, bankers said. The acquisition is on track to close later this year, subject to regulatory approval. KKR wrote its biggest-ever equity check in December 2017 when it bought Unilever’s spreads business for €6.825bn and also acted as a loan arranger.
KKR Capital Markets is the most active private equity firm in the loan arranging space as sponsors continue to build leverage finance capabilities and businesses, and is steadily moving up the US leveraged loan league tables.
KKR was 15th biggest bookrunner of US leveraged loans in 2017, with US$24bn of deals, up from 35th place in 2016 when it arranged US$3.4bn of loans, according to LPC league tables.
The firm jumped to 13th place in the leveraged buyout league table after arranging US$3.7bn of deals in 2017, up from 40th place in 2016 with just US$278.6m of deals.
In the first nine months of this year, KKR is 22nd in the US leveraged loan bookrunning tables with US$12.2bn of deals, and is in 14th place for underwriting buyouts with US$2.7bn.
“As the business has continued to grow, so has our capital base, and we are regularly committing to sizeable underwritings,” said KKR Capital Markets’ Cade Thompson.
Carlyle Group ranked in 56th place on league tables for leveraged deals during the first three quarters. TPG Capital was 73rd. Blackstone’s GSO Capital was 87th. Private equity firms have been growing their expertise and many have hired loan professionals from banks to boost their franchises.
Blackstone was also a lender to the US$13.5bn loan and bond financing backing its own buyout of Refinitiv, formerly Thomson Reuters’ Financial & Risk unit.
The groups maintain strict divisions between their private equity arms and capital markets lending operations to avoid accusations of conflicts of interest.
KKR has history with Sedgwick as an owner, but KKR Capital Markets also has a long track record of arranging the company’s loans. The lending arm of the private equity firm re-opened the market for dividend recapitalization deals in April 2016, when it took a US$325m loan to the market to pay itself a distribution after traditional banks declined the deal amid choppy market conditions.
Since then, KKR Capital Markets has led two loans for Sedgwick, an add-on and a repricing, which gives an advantage with the current deal when it comes to selling the deal to investors.
“We engaged early and proactively sought to have a role in the financing,” Thompson said. “It doesn’t hurt that we have an intimate knowledge of the company and have led several financings for Sedgwick.”
Carlyle was hiring that expertise when it mandated KKR to lead the loan, a lawyer specializing in leveraged buyouts said, adding that KKR and Carlyle also have a working relationship that they want to maintain.
“From Carlyle’s perspective, they’re saying I am paying the banks a certain amount of fees and are going to control the fee pot,” the lawyer said. “They obviously want to throw a fee to KKR Capital. It’s all based upon mutual interest.”
In the first three quarters of 2018, KKR has been involved in 21 deals larger than US$1bn, according to LPC data, compared to 26 deals for all of 2017 and just eight deals in 2016.
This includes a joint arranging role on a US$3.03bn and €930m (US$1.075bn) loan backing its buyout of business software provider BMC Software in June 2018.
KKR said that for the second year running, more than 50% of its transactions have been for companies backed by other private equity firms, and have also included some non-sponsored leveraged corporate loans.
“KKR’s done a superb job,” the lawyer said. “ I think everyone who was traditionally referred to as a private equity firm is trying to figure out how to get into leveraged finance more.”
The firm’s march up the loan arranging league tables has caught banks’ attention, some of which are losing some of their market share to KKR and other private equity firms.
“KKR has definitely made some big steps and they are really good at what they are doing,” said a loan banker. “The question is what happens when they hit a rough market, which they haven’t really seen yet. That will be the real tell of where they are as an underwriter.”
Bank of America Merrill Lynch declined to comment. Carlyle Group did not return a request for comment. (Reporting by Jonathan Schwarzberg Editing by Tessa Walsh and Michelle Sierra)