JPMorgan Chase & Co.’s $20 billion debt commitment for the record-breaking buyout of Electronic Arts Inc. is classic leveraged financing, which might seem surprising in a world overrun with private credit. But the boom in alternative lenders and banks’ drive to compete still plays a role – it’s why JPMorgan has a safety net in its own $50 billion direct lending pool if there are any troubles offloading the gaming company’s debt later. Private credit can be banks’ friend as well as foe.
Most major investment banks now have access to private credit funds, either in-house like JPMorgan and Goldman Sachs Group Inc., or through partnerships with other managers like those formed by Citigroup Inc. or Barclays Plc. The EA buyout highlights banks’ ability to blend or switch between private and syndicated loans when pitching for takeovers. Having both sources close at hand should help big lenders avoid getting stuck with unwanted risky loans as several did after Elon Musk’s ill-fated acquisition of Twitter Inc. It will still have to work for the borrower rather than mainly being a way to clear a bank's books.
Takeovers that rely on big debt packages have historically been funded by a short-term loan from a group of banks, known as a bridge, which is then refinanced through bond issues in public markets, or junk-rated loans that are popular among specific loan funds and US retail investors. Since the 2008 global financial crisis, a new kind of long-term private lending fund has taken root and in recent years bloomed into a major source of buyout financing. Such funds now have about $1.7 trillion in assets.
EA’s $55 billion take private announced Monday supersedes the $45 billion record-buyout of electricity utility TXU in 2007. While the price tag then was more than 80% debt and a thin sliver of equity, the EA deal is almost the reverse. The $36 billion cash being put up by Saudi Arabia’s Public Investment Fund, Silver Lake Management and Jared Kushner’s Affinity Partners, accounts for 65% of the deal’s value — and so is a very healthy cushion for the financing.
The debt will be risky though: After a $2 billion short-term working capital facility, the rest of the $18 billion in debt is at least 7.5-times EA’s earnings before interest, tax, depreciation and amortization over the past 12 months, according to a banker familiar with the deal. In comparison, the total value including equity in the TXU deal was only slightly higher at about 8.5-times Ebitda — add the equity into the EA deal and the multiple rises to more than 20 times. One comfort to EA’s lenders is that the business has produced consistently high free cash flow of between $1.7 billion and $2 billion over five of the past six years, according to data compiled by Bloomberg.
JPMorgan’s standalone commitment to raise the funding is rare but far from unique. This kind of swift, uncomplicated decision making is meant to be a key advantage of private credit, but big banks do make such promises, although typically with the aim of finding other lenders and investors to share the burden. Back in 2015, JPMorgan stood behind the $50 billion of funding for Dell Technologies Inc.’s takeover of EMC Corp. before quickly sharing it out among more than 100 lenders. Jamie Dimon, JPMorgan chief executive officer, personally OK’d the commitment to EA’s buyers, according to the Financial Times, just as he did for Dell.
The bank will look to do the same with the EA package and expects to have syndicated or sold all the debt it wants to offload by the time the buyout closes next year. It should be helped by the hunger for new leveraged finance deals after the slow pace of buyouts since 2022 and a flood of of debt-investment vehicles known as collateralized loan obligations that have been created this year. High demand has helped squeeze credit spreads – the premium that risky borrowers pay over Treasuries – to the lowest levels since early 2021 for large loans, according to Bloomberg’s US leveraged loan index.
Still, six months or so can be a long time in markets, especially with a deliberately unpredictable president in the White House. Syndicated loans are typically the cheapest way to fund a buyout, but as Elon Musk’s $44 billion Twitter deal showed, the market can shut swiftly. And that’s where JPMorgan’s private credit option – and other funds – could get a look in.
JPMorgan likes to think of itself as the only bank that is truly agnostic about where a deal like EA ends up being funded – insisting that it will always use the route that is most preferred by, or cheapest for the client. Goldman Sachs in contrast might offer its own private credit funds first refusal on new trades before taking them to markets, while banks with partnerships will try to source deals specifically for those funds separate from their leveraged finance business.
Private credit will typically be a more expensive form of debt although borrowers can see the cost as worth paying if they have special needs like privacy, higher debt loads, or other elements like equity warrants to wrap into the funding. But crucially, these alternative lenders have remained active and growing when leveraged loan markets were frozen in recent years – and banks were stuck with billions of hung debt from Twitter and other badly timed deals.
If JPMorgan and other banks brought into the EA financing get caught out by markets in the months ahead, the private credit pools to which they now all have access – and the hundreds of billions in other big alternative funds – will likely offer a different exit. Rather than its arch rival, private credit could turn out to be banks’ friend in times of need.
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