Fixed Income & Bonds Outlook

Recently, video game maker Electronic Arts (EA) announced its plan to be taken private

in the largest leveraged buyout (LBO) in history, at $55 billion. The creators of sports games

such as Madden and FIFA, as well as The Sims and Battlefield, will be controlled by a group of investors including Saudi Arabia’s Public Investment Fund, private-equity firm Silver Lake, and Jared Kushner’s investment firm Affinity Partners.

A leveraged buyout is when investors acquire a company using a mix of equity and debt, with the expectation that the company’s future cash flows will be used to repay the borrowed funds.

EA will use the traditional leveraged loan and junk bond markets to raise $20 billion of

debt. This means that a bank (JPMorgan Chase & Co. in this instance) will make a $20 billion

loan to EA; this loan, however, is too large and concentrated for JPMorgan to hold onto

indefinitely. They will offer pieces of the loan to numerous other investors who are interested in EA’s corporate debt. This corporate debt is commonly known as “junk bonds.” Through this

process, JPMorgan will reduce its exposure to the loan. Any debt that is not sold to other

investors is referred to as “hung debt,” as it would remain on JPMorgan’s balance sheet.

Junk bonds were extremely popular in the 1980s as the number of LBOs surged. More

recently, however, private credit has replaced some of the traditional financing options for LBO debt. Private credit refers to direct loans made by non-bank lenders such as asset managers, credit funds, and pension plans. Both junk bonds and private credit offer debt to companies, but each offers its own unique advantages.

As regulations on banks have become tighter, the market has looked to private credit as a source of leverage that is not as heavily regulated by the government. Additionally, private credit can provide faster and more flexible solutions to companies that want to take on debt.

Despite the massive increase in private credit, EA’s LBO will be financed through the

junk bond market. This is because the EA buyout involves about $20 billion in debt. While

private credit has grown rapidly, very few funds can underwrite something that large on their

own. Even if multiple funds agreed to be partners in the deal (which is called a “syndicate”), they would still struggle to write a check this big. EA’s LBO is a reminder that despite the growth in private credit, junk bonds are still the preferred way to finance transactions of this scale.