Fund managers are lining up to buy a piece of some of the riskiest slices of debt backing the $16.5bn buyout of software maker Citrix, in a sign of the resilient appetite for high-yielding investments even as financial markets wobble.
Banks led by Goldman Sachs expect to sell $3.95bn of junior Citrix debt in the coming weeks, according to three people briefed on the matter. Given the demand, the banks plan to reduce discounts they had offered to investors, effectively raising the price of the debt.
A sale of the debt would come as a relief for the banks that have been forced to keep debt from Citrix and other leveraged buyouts on their own books when a rapid rise in interest rates sank credit markets last year. Such “hung deals” have limited banks’ capacity to make new loans.
Selling the debt would also run against the grain in credit markets, as fears of further interest rate rises from the Federal Reserve has driven up bond yields and reduced prices.
More than a dozen banks were forced to put up their own cash to fund Vista Equity Partners and Elliott Management’s takeover of Citrix after investors balked at financing the debt package. Banks stand to lose $400mn or $500mn on the Citrix deal after accounting for interest earned — even if they succeed in cutting discounts.
Earlier efforts to sell the junior debt faltered. Demand was so scant last year that Goldman discussed lending to big money managers to entice them to buy a piece of it, a relatively rare move that underscored the lengths banks were willing to go to clear one of the biggest hung deals of 2022.
The conversations with hedge funds and asset managers focused on allowing a buyer to use borrowed money to buy the Citrix debt, which would have removed it from the bank’s balance sheet, according to five people with knowledge of the matter.
“This was a playbook [used] after the financial crisis, by using leverage and moving liabilities from one side of the ledger to the other,” one person with knowledge of Goldman’s plans said. “They’ve only done this on one or two deals.”
But a rally in corporate debt markets earlier this year prompted many investors to take a second look at Citrix. More senior debt issued as part of its buyout has jumped from 83.6 cents on the dollar to 86.5 cents, and briefly went above 90 cents at the start of this month.
Even as markets have sold off again over the past two weeks, money managers have warned that they have had few other options to pick through if they want to invest cash now.
While investors have raised questions over how Citrix will perform in a downturn and whether it will be able to hit targets laid out by management last year, the bonds have stood out compared to the few offerings headed their way. And of the deals they know banks could still bring — including the hung financings backing buyouts of Tenneco and Brightspeed — Citrix looks like a better bet, some investors said.
“There has been no primary issuance and . . . everyone is looking at deals to invest in,” one owner of Citrix debt said. They added, as a result, “a name like Citrix is catching a bid”.
Big money managers have been contacting Goldman, Bank of America, Credit Suisse and other lenders on the Citrix deal to inquire about buying debt worth several billion dollars this year, according to people close to banks and money managers.
The indications of interest mean the banks now expect the bonds could be priced with a discount of 16 to 22 cents on the dollar, for a yield that could ultimately be about 12 per cent, the people said. Earlier this year, investors had signalled they would be comfortable buying the debt with bigger discounts of between 20 and 22 cents on the dollar, with higher yields of 13 or 14 per cent.
Bankers on the deal hope that hefty discount will help them sell the vast majority of the debt in one fell swoop.
Demand has been fuelled by the fact that buyout activity has been slow this year, leaving money managers with few options if they are keen to invest in new debt. Positive preliminary results that Citrix has shared with its lenders since the leveraged buyout was completed has also helped the banks, boosting the value of debt they had previously sold.
The chunks of Citrix debt that the banks have sold has been more senior and less risky than debts Goldman is now marketing. The banks stomached losses of $600mn on the initial $8.55bn bond and loan sale in September, after offering heavy discounts to clients.
Bank underwriters have been waiting for Citrix and Tibco, the software maker it was merged with as part of its buyout, to report full-year audited results before fully launching the $3.95bn debt sale.
Additional reporting by Antoine Gara in New York