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Elliott Management, the hedge fund founded by billionaire Paul Singer, has upended a $4bn debt restructuring at a business owned by Carlyle Group, in a stand-off illustrating the tensions high borrowing rates are unleashing at private equity portfolio companies.
Veritas Holdings, a software business Carlyle bought in 2016, revealed in a securities filing this week that negotiations with an Elliott-led group of creditors over a 2025 debt maturity date had reached an impasse.
Elliott’s push to use its position as a large debtholder to extract a bounty threatens a last-ditch effort by one of the world’s largest private equity groups to salvage a multibillion-dollar investment.
The clash stems from Carlyle’s decision in February to spin off a division of Veritas and merge it with Cohesity, a private artificial intelligence software company whose backers include SoftBank, Sequoia Capital, and the billionaire technology investor Brian Sheth.
Carlyle designed the merger to refinance Veritas’s debt without having to draw more money from its decade-old fund that made the investment but now carries little cash. It is a challenge faced by a growing number of ageing private equity deals that typically would have been harvested years ago. Instead, many such portfolio companies are facing imminent debt maturities against a much harsher interest rate backdrop.
Private equity firms are sitting on a record $3.2tn in unsold assets, according to consultancy Bain & Co. Deals with about $500bn in debt mature by the end of 2028, according to PitchBook data. Without easy dry powder to draw, more groups will be forced to engineer solutions such as the Cohesity tie-up that requires no new money to be found.
But these efforts will face a stiff test from current creditors including loan funds and opportunists such as Elliott, which can buy debts trading at distressed discounts and then seek to reap a large windfall. These duelling forces then turn into contests to see which side blinks first.
Veritas has been negotiating a multi-step debt repayment and exchange offer with creditors holding $2.5bn of loans and $1.8bn in bonds which it says will enable the debt to be paid off at about 100 cents on the dollar.
Elliott and allies which hold more than half of Veritas’ debt have countered that the terms of the proposed restructuring would still leave them short-changed.
Elliott has disputed the value of the package that Veritas offered, which includes less than 60 cents on the dollar in cash repayment. The remaining 35 cents to 40 cents will come from assets with fuzzier worth, according to securities filings and people familiar with the hedge fund’s thinking. Elliott is pushing Carlyle for additional upfront cash as well as a greater stockpile of the remaining assets.
Elliott, which famously prevailed in a decades-long debt fight with Argentina, is considered one of finance’s most formidable scavengers. Carlyle is a pioneer of the leveraged buyout industry, co-founded by David Rubenstein, and has counted ex-heads of state and captains of industry among its leaders.
In its securities filing on Monday, made public after the latest round of negotiations, Veritas wrote its offer was “highly constructive”, and it remained “ready and willing to work constructively towards a fair par exchange”.
A person close to the Veritas camp described Elliott’s brinkmanship as “terrorism 101”. Another person aligned with Veritas maintained the Cohesity merger was a “huge net positive for everybody involved” allowing Veritas creditors to avoid haircuts to their debt that once seemed inevitable.
Veritas has struggled since Carlyle bought it from Symantec for $7bn. Its debt has traded below 80 cents on the dollar, a level generally viewed as a sign of financial distress that Elliott viewed as an opportunity.
The crown jewel of Veritas, however, is its “data protection” segment that complements the Cohesity business. The companies have valued the combined businesses at $7bn.
After the planned merger, Cohesity is set to raise $3.2bn in new debt and send $2.5bn back to Veritas. Creditors of Veritas would then receive 56 cents on the dollar in cash. The rest of the payment to creditors is to come in the form of fresh debt issued by Veritas, secured in part by its equity stake in Cohesity.
The person close to Elliott, however, expressed concern about the value of the remainder of Veritas after it spins off its best business, and the terms of the Cohesity collateral, describing it as a “roll of the dice”.
Other Veritas creditors include BlackRock, Pimco, Canyon Partners and Silver Rock Financial, an investment firm funded by Michael Milken. Carlyle has expressed optimism that some of these parties can help bridge the chasm between Elliott and Veritas.
Elliott and several allies, however, have formed a so-called “co-operation agreement” that binds them to collectively adopt a unified posture against Veritas and Carlyle.
“Someone involved is frankly overplaying their hand,” said one adviser in the middle of the stand-off.
