The New Power Of Private Credit

Private credit deals have jumped in recent years from traditionally moderate-sized transactions by leveraged or private companies to gigantic financings by investment-grade multinationals: a major leap that’s likely to continue.

Meta Platforms and Blue Owl Capital’s recent $27.3 billion “Beignet” joint venture is the largest such transaction to date. For $23 billion, Blue Owl acquired an 80% equity stake in the joint venture created to further develop Meta’s existing Hyperion datacenter. The transaction is funded partly by a private debt offering to institutional bondholders led by Pacific Investment Management Company, Bloomberg reported.

Meta retains the remaining 20% and will provide $5.76 billion in construction financing. In an October report, S&P Global confirmed the debt offering’s A+ rating, a notch below Meta’s rating, and the debt will remain off the tech giant’s balance sheet.

Investment-grade borrowers have long paid a premium for private credit; typically, privately placed corporate debt or structured finance. Reasons for doing so include the ability to customize terms and complete transactions relatively quickly and reliably.

“When there’s a dislocation in the public markets, the private market is always open,” says Laura Parrott, senior managing director and head of private fixed income at asset manager Nuveen, a subsidiary of TIAA. Investors are mostly insurance companies, she notes, whose annual mandates must be filled regardless of market conditions.

Nuveen focuses on traditional private credit, which consists typically of fixed-rate bond issues ranging from $100 million to $500 million. The investment-grade borrowers span the globe and tend to be private companies or firms with strong credit quality that issue irregularly. The proceeds are used for anything from general corporate purposes to building airports and stadiums.

More recently, Parrott says, large, investment-grade technology companies have ramped up use of the market to finance data centers and related digital infrastructure, including power plants serving the data centers and transmission upgrades for utility companies. “We’re seeing a tremendous tailwind of investment opportunity just around that digital world.”

Investment-grade companies with extensive capital needs in other industries are also entering the market. In June, Apollo Global Management announced the completion of a $750 million private financing for Mumbai International Airport. Lenders in the four-year deal, which will refinance existing debt to support operations and accelerate capital expenditures, include MetLife, Blackrock, and Hong Kong-based FWD Insurance, according to Bloomberg.

More recently, large multinationals with investment-grade ratings are engaging in private credit in transactions that can provide them with billions of dollars in capital; the Beignet deal is an extreme example. These transactions are often structured to lessen the impact on the companies’ public debt ratings; joint-venture structures may remain only partly on the company’s balance sheet.

Companies in other industries pursuing major capital expenditures are also partaking. Private-credit transactions often take a hybrid structure, such that rating agencies view at least a portion of the capital as equity, whereas a 100% debt deal could jeopardize the company’s debt rating.

Last spring, Rogers Communications (RCI) received $7 billion in cash proceeds for providing private-equity giant Blackstone 49.9% ownership of a joint venture controlled by the radio and telecom giant. RCI used part of the funds, which are managed by Blackstone Credit & Insurance and major Canadian institutional investors, to acquire a majority stake in Maple Leaf Sports & Entertainment. Because S&P viewed Blackstone’s stake as partly equity and only partly debt due to Rogers’ payment commitments to the joint venture, it refrained from downgrading RCI’s barely investment-grade rating of BBB-.

In a convenient match, life insurers are hungrier than ever for the attractive but relatively safe yields available through investment-grade private credit to match against liabilities stemming from rising annuity sales to Baby Boomers: a dynamic likely to continue for the foreseeable future.

“This newer vintage of investment-grade private credit elegantly bridges the needs of those two constituents,” Christian O’Donnell, head of debt solutions at J.P. Morgan, said in a June 15 podcast. “There’s a massive need for capital in a variety of different sectors in the United States and globally, like digital infrastructure, or technology, or artificial intelligence, or energy, or manufacturing, and a host of other areas.”

What investors like, O’Donnell noted, is that yields are 100 to 200 basis points higher than for publicly traded bonds.

In the US markets alone, Bloomberg recently reported, investment-grade technology companies raised upwards of $157 billion of private credit in the year through late September, a 70% increase over the previous year. The transactions are particularly useful not just for their customization but more favorable balance-sheet, rating agency, or accounting treatment than the companies would receive if they issued public debt.

The A+ rating that S&P Global gave the Beignet joint venture bonds reflects the fact that the transaction effectively transferred all construction risk to Meta, whose exceptionally deep pockets mitigate construction risks and support stable operational cash flows through full debt repayment, according to the rating agency. The deal also provides a unique mechanism for repaying remaining debt should Meta not renew its leases. More standardized public bond deals can’t provide such structural features; plus, the debt resides far from Meta’s balance sheet and does not impact its AA- bond rating.

Blue Owl, Meta’s joint-venture partner, does not own an insurance company, but in July 2024 it acquired Kuvare Insurance Services, an alternative asset manager that services the insurance industry. Other major players in the space include Blackstone, which has struck up partnerships with insurers, and Apollo and KKR, which each have acquired major insurance companies eager to invest in high-grade private debt.

Scott Flieger, senior director at NeuGroup, which organizes meetings of corporate finance executives globally, says his firm in recent years has suggested that treasurers at investment-grade companies monitor developments in the private-credit market, which could be useful in addressing special situations.

“If you’re the treasurer of a big investment-grade company,” he says, “you may prefer a bespoke solution where a private equity firm can lend you money at a premium that’s structured in a way that’s not counted as debt.”

In many private-credit transactions—the Beignet deal is a case in point—the private equity firm acquires a significant minority stake in the joint venture, often as much as 49%, leaving its corporate partner in control. Much of the investment capital, however, is provided by insurance companies in the form of private debt that Gregg Lemos-Stein, S&P’s chief analytical officer, corporate ratings, calls “back leverage.” The company’s bare-majority stake is equity, but such transactions typically require minimum cash flow commitments to the joint venture that are passed on to the private equity firm and its lenders.

As a result, the company may get more favorable treatment from a ratings perspective, but not full equity treatment. In October, Apollo and KKR ponied up $4 billion to acquire a 49% minority investment in a joint venture supporting Keurig Dr Pepper’s acquisition of JDE Peet’s N.V.; S&P expected the financing to receive 70% effective equity treatment.

“There’s back-leverage debt and there are floors and minimums that you wouldn’t get if you’re an equity investor,” says Lemos-Stein. “From our position, there’s no free lunch. They’re funding their positions with debt.”