Banks prepare to offload $18bn in debt tied to EA take-private deal
Blockbuster junk bond and loan offering will test investor appetite at a time of heightened nerves over AI disruptions
Wall Street banks have started offloading $18bn of debt tied to the $55bn leveraged buyout of video game maker Electronic Arts, a test of investor appetite as the war in Iran and AI advances shake the credit market.
The marquee transaction, which will help finance the biggest-ever leveraged buyout, is being closely watched for signs of investor uptake as banks ready a handful of large deals they are keen to move off their balance sheets.
The deal comes as riskier bonds and loans have come under pressure in recent weeks following a sell-off of software debt, pushing up borrowing costs of junk-rated companies. It comes after EA agreed in September to be taken private by a Saudi-backed consortium assembled by Jared Kushner and Silver Lake.
“Banks want to de-risk,” said Joseph Lynch, global head of non-investment-grade credit at Neuberger Berman. “Now we have this backlog of macro concerns, banks are saying ‘let’s not sit on this for another month, let’s just get this off our books right now’.”
More than a dozen banks, led by JPMorgan, launched a $5.75bn dual-currency leveraged loan sale on Monday, followed by another $9bn of high-yield bond issuance scheduled for the next few days, according to people familiar with the matter. The financing package also includes a $3.25bn term loan held by banks, which was launched in late January.
In a bid to secure big cheques, JPMorgan has been privately asking its largest asset management clients to commit at least $500mn each, according to people familiar with the efforts.
The bank also organised one-on-one investor meetings with Andrew Wilson, the chief executive of EA, during its annual leveraged finance conference in Miami earlier this month, the people added.
JPMorgan declined to comment.
A banker familiar with the transaction sought to distance EA — maker of EA Sports FC, Madden NFL and The Sims series — from the enterprise software companies that face the biggest threat of disruption from AI.
“It’s not a software-as-a-service business,” the banker said. “What EA sells is the experience, and they differentiate themselves with licences and contracts with major sports franchises.”
EA management, who pitched potential investors on a call on Tuesday, said they believed AI would provide a boon to the gaming industry, allowing companies in the sector to eventually reduce their engineering workforces.
They told investors generative AI could not replicate the physics simulations that the company’s gaming engines process, and instead offered a view that the two could coexist, like Oscar-winning film director Steven Spielberg and YouTube content creator MrBeast, according to a person on the call.
Despite that optimism, video game stocks have come under pressure as new AI models have been unveiled, including from Google’s debut of Project Genie. The search giant’s AI “world model”, while still only a prototype, showed that video game-like virtual worlds could be created instantly using only a short text prompt.
Investors see robust initial demand for the EA leverage loans — sold in dollars and euros — which are expected to yield 3.5 to 3.75 percentage points above benchmark at 98.5 cents on the dollar, or just below 7.5 per cent all-in yield, according to people briefed on the debt sales. The loans are expected to receive a split of BB and Ba3 credit ratings.
The secured bonds are being marketed at similar yields, while the unsecured high-yield bonds were expected to yield about 8.5 per cent, the people said.
The banks selling the debt are offering investors higher compensation for risk than is typically on offer for similarly rated deals, in part because the transaction is so large.
Initial pricing on the deal resembles that of a B-rated issuer, which on average sold loans at about 3.8 percentage points above the benchmark rate in the past 30 days, according to PitchBook LCD data. BB-rated companies, on the other hand, traded about 2.4 percentage points above the benchmark during the same period.
“The initial price talk looks pretty attractive to us,” said a large institutional investor who committed to the loans across both currencies. “We think they’re pricing it at the right level for the risk that the business carries.”
Stable recurring revenue from game subscriptions, combined with the potential to increase sales from advertising, bolstered the creditworthiness of EA, the investor added.
Investors also took comfort in the $36bn equity commitment from the consortium formed by Silver Lake, Affinity Partners and Saudi Arabia’s Public Investment Fund, said Marina Lukatsky, global head of research, credit and US private equity at PitchBook LCD.
“When you have a larger equity component, there’s a bigger cushion to soften the blow if something happens to the company’s performance in the future,” Lukatsky said.
However, some investors remain defensive, particularly considering the narrower yields in final pricing owing to strong demand.
“Anything that has AI disruption risk is an absolute non-starter for us,” said another institutional investor who shunned EA’s loans.