Private Credit Firms’ Hot Strategy to Cut Leverage Wins Over Keurig Dr Pepper

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(Bloomberg) — Keurig Dr Pepper Inc. had a problem: Investors were skeptical of how much debt the company would be taking on with its proposed acquisition of JDE Peet’s NV. 

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To alleviate those concerns, the company chose to tap $7 billion of financing that won’t weigh on its debt levels, including a type of investment that’s become popular for private credit players to provide in recent months. 

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Apollo Global Management Inc. and KKR & Co. are providing the financing, according to a statement on Monday. The firms will make a $3 billion convertible preferred stock investment in the soon-to-be-separated beverage company, while the remaining $4 billion will be an investment into a newly formed joint venture that will manufacture coffee pods. Goldman Sachs Alternatives is also investing in the venture.

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Private credit funds are pumping more money into newly formed JVs as a way of providing financing, a structure that doesn’t add debt to the balance sheet of the company receiving the funds. While Keurig didn’t disclose the deal’s exact structure, companies typically promise to keep using the assets going into the JV and create a set of cash flows. Keurig’s newly formed JV will house its US and Canada single-serve manufacturing assets, with Keurig keeping a controlling interest and operating control. 

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Essentially, a private credit firm doles out the capital in the form of equity, but then repackages it into notes that can more easily fit within their portfolios. Most of these transactions are structured to be investment-grade, which generally attracts insurer capital. 

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Representatives for Keurig, Apollo, KKR and Goldman Sachs declined to comment.

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Apollo has done a number of these deals. Last year, Intel Corp. agreed to sell a 49% stake in a venture that controls a plant in Ireland to Apollo for $11 billion, helping bring in more external funding for a massive expansion of its factory network. In 2020, Apollo led a transaction to buy a 49.9% stake in Anheuser-Busch InBev’s US-based metal container plants for about $3 billion, which was used to repay debt. 

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In September, Blackstone Inc. led a $7 billion equity investment in a liquefied natural gas export plant in Texas, via a venture that would own the new facilities and receive cash from contracts with large, investment-grade customers. Blackstone and its partners planned to repackage the financing into senior and junior notes that can be privately rated and more easily housed in some of the firm’s credit funds, including those set up for insurance companies. 

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Moody’s Ratings and S&P Global Ratings said they were considering cutting Keurig’s ratings following news of the acquisition in August to the lowest rung of investment-grade. The acquisition was initially set to lift Keurig’s net debt to $38 billion, including a EUR16.2 billion ($18.9 billion) bridge loan that Keurig got from Morgan Stanley when the deal was announced.

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But with the new $7 billion financing plan, Keurig now expects to have $31 billion of net debt following the acquisition, the company said in its statement. That would reduce Keurig’s leverage to 4.6 times earnings, down from 5.6 times. The preferred equity investment will pay a dividend of 4.75%, according to an investor presentation from Keurig.