More than 70% of the Sycamore deal is financed through debt, meaning that the private equity firm doesn’t have “much skin in the game,” according to Parr. The risks of bankruptcy are especially troubling, according to the Private Equity Stakeholder Project. In the first quarter of this year alone, 70% of large U.S. corporate bankruptcies involved private equity-owned companies, despite private equity making up only 6.5% of the economy.
7 replies (most recent on top)
Lenders in leveraged buyouts like the Sycamore-Walgreens deal, including major banks (e.g., Goldman Sachs, JPMorgan, Wells Fargo) and private credit firms (e.g., Ares, HPS), typically participate despite the high debt levels (83% in this case) for several strategic and financial reasons. These decisions are driven by calculated risks, potential rewards, and market dynamics, even as critics highlight the elevated bankruptcy odds due to the leverage being double the 2024 private equity average of 41%. Here's a breakdown of key motivations based on available analyses:
Higher Yields and Returns: Debt in such LBOs is often structured as high-yield loans with floating interest rates tied to benchmarks like SOFR, offering lenders premiums (e.g., spreads of several hundred basis points) to offset risks. This appeals to private credit investors seeking better returns than low-yield government bonds or corporate debt in a persistent low-interest-rate environment, where capital is abundant and yield-hungry institutions are willing to fund riskier deals. For instance, Goldman Sachs' involvement in a $2.25 billion term loan and $2 billion bridge facility signals confidence in extracting value through operational improvements, potentially leading to strong interest payments or refinancing upside.
Secured Collateral and Senior Positioning: Much of the $18+ billion debt package is senior secured and asset-based, backed by Walgreens' receivables, inventory, real estate, and other tangible assets. This provides lenders with priority claims in case of default, reducing net exposure compared to unsecured debt. Facilities like the $5 billion revolving credit and $2.5 billion FILO term loan are designed with covenants and collateral to protect capital, making the risk more palatable.
Fees and Syndication Opportunities: Underwriting banks earn substantial upfront fees (often 1-3% of the loan amount) for arranging and committing to the financing, regardless of long-term outcomes. They can then syndicate portions to other investors, spreading risk while profiting from the deal's scale. In a massive transaction like this, these fees alone can justify participation for lead arrangers.
Belief in Turnaround Potential: Lenders may bet on Sycamore's retail expertise to revive Walgreens through cost-cutting (e.g., closing 1,200 underperforming stores), asset sales (like the $15.76 billion VillageMD stake via DAP rights, potentially yielding $3 per share), and operational efficiencies in pharmacy and healthcare services. Walgreens' stable cash flows from essential prescriptions and its market position provide a buffer, unlike riskier sectors. Despite Sycamore's mixed track record (e.g., bankruptcies at Belk and Nine West), some see parallels to successful restructurings.
Portfolio Diversification and Market Trends: Institutional lenders, including pension funds and endowments backing private credit, diversify into high-leverage deals as part of broader strategies. The rise of private debt markets has made such financing more common, with lenders viewing Walgreens as a defensive play in healthcare/retail amid economic uncertainty. However, floating rates expose them to hikes, and critics note the deal's structure could strain resources if performance falters.
Overall, while the deal's leverage amplifies downside risks like default or forced asset sales, lenders mitigate this through structuring, fees, and upside potential—reflecting a classic high-risk, high-reward calculus in private equity financing.
Who financed the debt for Sycamore? What is in it for them?
How does a failing company FIND people to give them loans? Who is willingly giving Walgreens 70% of debt? Someone asked this previously and I thought it was a good question.
Perhaps the people issuing this debt are ripping off people willingly to invest in such debt vehicles? Sort of like the mortgage fraud in 2007 or 08 or whenever that was. Selling junk but saying it is AAA rating.
There will be some news in October, heard from several sources. Not sure what though..
@ak This appears to be a likely scenario. Just wondering what’s going on behind the scenes presently. Crickets.
That’s how PE works. They’ll borrow money off Wag. Name. With that money they’ll pay themselves a handsome fee, cause they work so hard. The rest will go to investors. The debt belongs to wag. Not to Sycamore. Meanwhile, they wh--e out wag. For anything. Sell everything that’s not bolted down. No help for Joe employees or any improvements to stores. You’ll need to do more with even less. Most likely they get rid of long term employees with high salaries first, then they’ll get rid of the rest. If you think it was bad under previous management?
I’m wondering how they allocate the debt to Walgreens, boots and village MD.