Medtronic's latest annual report to shareholders states:
We’ve been focused on separating our Patient Monitoring and Respiratory Interventions businesses.
The Carlyle Group is in exclusive talks to buy those businesses. Carlyle may finance its buyout with debt that provides for an expansion of the principal in lieu of interest payments.
Bloomberg reported:
The private lenders are looking to provide a roughly $2.6 billion unitranche loan, which is a blend of senior and subordinated debt popular in the private credit world, according to people familiar with the matter. They are offering the option to PIK a portion of the interest expense, meaning it would be paid with more debt.
Pricing is currently being discussed at 550 basis points over the Secured Overnight Financing Rate, SOFR, according to the people. Half of that spread would be eligible for PIK treatment, the people added.
With three-month SOFR at 5.4%, (Carlyle affiliate) Medtronic is looking at paying nearly 11% in annual interest costs.
It's debt with built-in leverage expansion.
Carlyle likely sees "interest rolled into debt" as cash flow positive. That would help make the deal work. It's kind of like a temporary rebate that comes back to haunt at refinancing. The financing laid out would add over $350 million in additional debt to those Medtronic divisions over a five year period.
Remember what Oaktree's Howard Marks said in a recent interview with Carlyle Group co-founder David Rubenstein:
"Nobody ever repays their debts. They just refinance it...."
Yes, the PEUs do. That said, we are entering the "loan to own" era where senior creditors will increasingly take over companies unable to refinance.
If you like chaos in our political system, just wait. PEU affiliate musical chairs could cause quite the scramble. That should worry anyone wanting a stable, affordable healthcare system.
