Pathway finds ally in Ares for US$1.28bn debt deal

By David Brooke and Aaron Weinman

NEW YORK, June 15 (LPC) - Veterinary services provider Pathway Vet Alliance has turned to the private debt market to place a US$255m second-lien loan that would have made a larger debt package a harder sell among investors.

The second-lien loan was privately placed with asset manager Ares Management, according to two sources. That allowed the company to lighten the total debt load ahead of a bank meeting for the remaining portion of a US$1.28bn debt package, which backs Pathway’s acquisition by private equity firm TSG Consumer Partners.

The financing also includes a US$945m first-lien loan and a US$80m revolving credit facility, the sources added.

Jefferies is leading the deal.

Lenders that underwrote loans for acquisitions before the coronavirus impacted the capital markets were left with little choice but to hold off on syndicating that debt as cautious investors were reluctant to participate in new financing opportunities. In some cases, companies have turned to pricier, opaque structures such as privately placed second-lien loans.

Pathway is also no stranger to the private credit market. In 2016, Morgan Stanley Capital Partners bought the company and rapidly expanded it by acquiring several independent veterinary clinics.

Ares first invested in the business in the fourth quarter of 2017, initially in a first-lien position, before adding a second-lien position in the fourth quarter of 2018, according to data from Refinitiv BDC Collateral.

Over the last four years, several business development companies, including New Mountain Capital, the Carlyle Group and Goldman Sachs have invested in Pathway’s debt, Refinitiv BDC Collateral data shows.

“Demand for private placements is deep, and the pricing threshold is at a level that can get (investors) excited,” one senior banker said.

A spokesperson for Ares was not immediately available for comment. Spokespeople for Jefferies and TSG declined to comment.

MARKET-IN-WAITING

Private credit investors with deep pockets have showcased their ability to commit to large, middle market loans that may have been broadly syndicated in the past.

Food distributor US Foods, for example, privately placed a US$300m loan with Guggenheim Investments that was originally destined for the broadly syndicated market in April, Refinitiv LPC reported at the time.

In May, internet host WebPros privately placed a US$145m second-lien loan that was part of a US$745m debt deal backing its acquisition by investment fund CVC Partners. Earlier last month, billing software provider Conservice offered a US$190m privately placed second-lien loan that supported an investment by private equity firm Advent International.

While private debt fundraising is in a slump – the first quarter of 2020 generated commitments of US$14bn, the worst quarter total since 2016 – the market globally has US$169bn in dry powder to invest in new deals, according to financial research firm Preqin.

With perhaps the worst of the coronavirus pandemic behind the United States, optimism is growing among private lenders. Approximately 90% said they were interested in acquisition finance in a recent Proskauer survey conducted in early May, up from 74% in late March.

Pathway manages 270 general veterinary practices and a further 85 locations under its Thrive brand, the company's affordable care arm. (Reporting by David Brooke and Aaron Weinman. Editing by Michelle Sierra and Kristen Haunss.)