Pluralsight Change Of Control Transaction – The Tip Of The Private Credit Iceberg?

The growth in private credit (lending by institutions other than banks) has been one of the most significant capital market developments of the last decade. It is estimated that the size of the private credit market was approximately $1.5 trillion at the start of 2024 and could grow to approximately $2.8 trillion by 2028.¹

Various news outlets covering Vista Equity Partners' investment in Pluralsight² are reporting that Vista has agreed to a partial debt-for-equity exchange with its private credit lenders, including Blue Owl Capital, Ares Management, Golub Capital, Oaktree, Benefit Street Partners, Goldman Sachs, and BlackRock. This change of control transaction will result in the lenders taking 100% ownership of Pluralsight and will reduce Pluralsight's funded debt by $1.3 billion. The lenders / new owners are also reportedly investing $250 million of new capital into the business. This follows reports that Pluralsight implemented a drop-down transaction earlier in 2024 pursuant to which it transferred certain intellectual property to a restricted subsidiary with Vista making a $50 million loan or preferred equity investment (reports differ) to this subsidiary to enable Pluralsight to make an interest payment to its lenders. As part of the transaction, Vista is reportedly being repaid this $50 million.

A private equity sponsor initiating and funding a liability management exercise or "LME" (the drop-down), and private credit lenders "taking the keys" of their borrower in an out-of-court distressed exchange, are being reported as ground-breaking events in the realm of large cap private credit. Regarding the LME, in particular, Vista's drop-down was one of, if not, the first sponsor funded LME³ of a private credit-backed company and raised the attention of the market – with some expressing the view that it marked a new page in the playbook of sponsor's driving a restructuring to preserve optionality⁴ and others downplaying the significance.⁵ The confluence of these events begs the question of whether Pluralsight is unique and a one-off transaction, or a window into the changing dynamics between private equity sponsors and private credit lenders when a borrower is distressed?

Background

Pluralsight is a private company and has not publicly confirmed the specific terms of the reported transactions. Nevertheless, the financial press reports the following:

• Vista acquired Pluralsight (then a public company) in a take private transaction in April 2021.⁶
• Vista acquired Pluralsight at an approximate $3.5 billion valuation.
• The acquisition was funded in part with a $1.175 billion recurring revenue loan and a $100 million revolver.⁷
• News reports ⁸ detailed operating headwinds that necessitated:
  (i) additional equity financing; (ii) reductions in force and the replacement of the co-founder and CEO in April 2024; (iii) debt marked below par by the holders; and (iv) a write-down by Vista of its equity position to zero.
• Sometime in early Summer 2024, Pluralsight implemented a $50 million liability management transaction pursuant to which it caused certain intellectual property to be conveyed to a restricted subsidiary, with Vista then loaning or receiving preferred equity in that subsidiary for $50 million that was used to fund an interest payment to Pluralsight's lenders.⁹
• Vista's LME was ultimately insufficient to bridge through a turnaround plan,¹⁰ and Vista agreed to walk away and turn over the company to its lenders.¹¹

Observations

Although the specific factual, legal, and relationship dynamics will drive each specific deal, the Pluralsight transaction echoes a number of general market trends and may be a harbinger for the private credit market going forward.

General Debt (Syndicated) Market Trends

1. A chapter 11 restructuring is a time intensive, costly, and potentially uncertain process. As such, holders of broadly syndicated corporate debt historically first attempt an out-of-court transaction, if possible, to effectuate a debt restructuring of their borrower. These debt restructurings include a variety of structural elements, including; (i) amend and extend; (ii) additional equity financing coupled with covenant relief and increased pricing; (iii) sale of non-core assets; (iv) changes in corporate governance; (v) debt exchanges and increased pricing; and (vi) more recently, lender-on-lender violence in LMEs.
2. The absolute size and cumulative experience of lenders with distressed experience often lead to these lenders actively structuring the terms of the debt restructuring, rather than responding to a proposed transaction by the borrower.
3. The litigation risks and uncertainty associated with LMEs is driving lenders to enter into cooperation (or co-op) agreements to avoid or minimize lender-on-lender violence.
4. Experience to date suggests that most LMEs are not a panacea for a company's financial distress, but rather one step in a multi-step restructuring process that may or may not result in value maximization.
5. Lenders are thus revisiting the wisdom of an interim transaction that arbitrages market discounts and provides short-term runway for the borrower and instead are focusing on a change in control recapitalization solution with the lenders taking over ownership and the sponsor exiting.

What was old is new. The early years of distressed investing focused on converting unsecured debt (purchased at a low valuation ) into equity (to be sold in the future at a higher valuation). This distressed arbitrage has now evolved to the conversion of secured debt into equity. Non-bank lenders will be owners, not because they purchased distressed debt with a view to own the borrower, but rather as a means to maximize the value of their investment by being the owner of a stabilized company with a right-sized balance sheet.

Private Credit (Non-Syndicated) Market Implications

1. It has been long thought by some that private non-syndicated credit lenders may be reluctant to take aggressive adversarial positions vis-à-vis sponsors upon whom they depend for the next deal. This presumption may be breaking down as private credit lending becomes more concentrated, thus leaving sponsors with fewer alternatives to finance their next deal.
2. Private credit lenders have significant capital to allocate and more diverse experience than traditional bank lenders, making them less averse to taking ownership of a distressed company. Private credit lenders are also equally comfortable as initial lender, bridge lender, or owner because of their flexibility to allocate capital as necessary.
3. LMEs anchored by all lenders, some lenders, or the sponsor, may be abandoned in favor of a full change of control and balance sheet restructurings in order to avoid the transaction costs, uncertainty, and business impact of a multi-step restructuring transaction. This has long played out in the syndicated debt market (both in- and out-of-court) and the tea leaves suggest it is beginning to play out in the non-syndicated debt market as well.
4. Absent additional equity infusions or growth in the asset or revenue base to support additional financing, sponsors may be more constrained than ever to operate within the confines of its credit documents or interim amendments thereto that provided breathing room to their distressed portfolio company. The days of amend and extend may well be waning.
5. For private credit lenders in the non-syndicated debt market, a new loan may be increasingly a binary underwriting exercise: (i) receive the contracted-for yield if the borrower performs; or (ii) own the borrower if the borrower's operations falter and the sponsor does not provide equity to reset operations.

Footnotes

1 Understanding Private Credit, Morgan Stanley (June 20, 2024), https://www.morganstanley.com/ideas/private-credit-outlook-considerations.

2 See e.g., Dan Primack, Vista Equity writes off Pluralsight value, after $3.5 billion buyout, Axios, (May 31, 2024), https://www.axios.com/2024/05/31/vista-equity-pluralsight ("Axios"); Private Credit: Impact of Pluralsight's Potential Restructuring Will Be Widely Dispersed and No Effect on Ratings Expected, KBRA (June 5, 2024), https://www.kbra.com/publications/mpftfNbZ/private-credit-impact-of-pluralright-s-potential-restructuring-will-be-widely-dispersed-and-no-effect-on-ratings-expected,

(last visited Aug. 4, 2024) ("Business Wire") (detailing terms of Vista's drop-down liability management exercise); Olivia Fishlow, Pluralsight raises new preferred equity financing, IP assets shifted to subsidiary, PitchBook (June 10, 2024), https://pitchbook.com/news/articles/pluralsight-raises-new-preferred-equity-financing-ip-assets-shifted-to-subsidiary ("PitchBook I"); Krista Giovacco , PluralSight Raises Preferred Equity, Conducts Drop-Down Liability Management Transaction, LevFin Insights (June 13, 2024), https://know.creditsights.com/pluralsight-raises-preferred-equity-conducts-drop-down-liability-management-transaction/, ("LevFin"); Milana Vinn, Exclusive: Vista Equity in talks to hand over Pluralsight to creditors, sources say, Reuters (July 3, 2024, 4:31 AM), https://www.reuters.com/business/finance/vista-equity-talks-had-over-pluralsight-creditors-sources-say-2024-07-02/ ("Reuters") (providing details on Vista's investment, Pluralsight operations and debt, and talks of Vista handing oer Pluralsight to its lenders);Eric Platt and Amelia Pollard, A messy loan restructuring highlights risk lurking in private credit, Financial Times (July 10, 2024), https://www.ft.com/content/b10dbb08-c745-40d0-a7fc-9b4024f1fd10, ("Financial Times") (same); Jodi Xu Klein, Vista Equity's Pluralsight to Cede Control to Private Lenders, WSJ PRO Bankruptcy (July 29, 2024 4:56 PM), https://www.wsj.com/articles/vista-equitys-pluralsight-to-cede-control-to-private-lenders-fed39cde ("WSJ") (same); Olivia Fishlow, Direct Lenders to take control of Vista's Pluralsight, PitchBook (Aug. 1, 2024), https://pitchbook.com/news/articles/direct-lenders-to-take-control-of-vistas-pluralsight, ("PitchBook II") (same).

3 LME: Trading through prisoner's dilemmas, Barclays, FICC Research, Credit Strategy (July 29, 2024), ("Barclays") ("While creditor-on-creditor violence has been more of a theme in public credit markets, the highlight publicized Pluralsight restructuring showed recently that private credit is not completely immune to the same forms of aggressive LME.").

4 PitchBook I ("Market participants have typically argued that such transactions don't occur in private credit markets, since the clubs are smaller and there is a greater focus on relationships.... 'Once the seal has been broken of these blue-chip private equity firms disadvantaging their lenders, then all bets are off,' said HPS Investment Partners managing director Colber Cannon, speaking at a May 16 Moody's conference on private credit.").

5 Business Wire ("It has now also been reported that Pluralsight, as allowed by its credit agreement, has shifted certain intellectual property assets into a new wholly owned subsidiary. The subsidiary subsequently entered into a new financing agreement with Vista to raise additional debt, whose proceeds were used to meet Pluralsight's upcoming interest payment obligations. KBRA considers these steps to be reasonable and allowable stopgap measures as lenders and sponsors attempt to negotiate a recapitalization. KBRA continues to believe that one of the hallmarks of the private credit industry is the ability of lenders and sponsors of the private credit industry is the ability of lenders and sponsors to manage many distressed situations in a relatively orderly fashion."); Pitchbook II (quoting Kurt Schnabel, co-head of Ares US direct lending, one of the lenders in the deal, "[t]he document protection has actually worked pretty darn well in that transaction as well").

6 Vista Equity Partners Management, LLC, https://www.vistaequitypartners.com/companies/portfolio (last visited Aug. 4, 2024).

7 See Financial Times ("The loans to Pluralsight were extended in 2021, as part of Vista Equity Partners' $3.5bn buyout of the company. It was a novel loan, based not on Pluralsight's cash flows or earnings, but how fast its revenue was growing. Regulated banks are unable to provide this type of credit, which is deemed too risky. A who's who of private credit lenders – including Blue Owl, Ares Management and Golub Capital – stepped in to fill the void."). Quoting from an October 2021 S&P Global Market Intelligence piece, Petition recently provided the following summary of the loan:

Aiding private credit in its ability to compete with syndicated markets is that it need not comply with the same regulatory regime as the banking industry. EBITDA adjustments can be too complex or stretched for rating agencies' comfort level, which is inhibitive to a syndicated solution," Wells Fargo analyst Finian O'Shea said in the research note.

The "Golden Age." Parts V & VI, Petition(June 5, 2024), (subscription on file with author).

8 See supra note 2.

9 See Financial Times (describing the transaction and the reaction to it: "[t]he most recent public marks came before Vista shuffled assets within Pluralsight, setting off fireworks with creditors (several alleged Vista improperly valued the assets it moved to a subsidiary, three people involved in the matter said. A person familiar with the company said the valuation was done by a third-party firm in an 'arms-length process'). While the move did not strip assets from creditors, it gave Vista first priority to be repaid on the extra capital it was putting into the business, money that was used to make an interest payment to lenders.").

10 The high percentage of LME's being followed by a second step restructuring transaction has been widely noted.

A recent Barclay's study suggests that value maximization might be better served by foregoing a stop gap LME for a wholistic restructuring – a proposition discussed in depth in the article Creditors Strike Back: The Return of the Cooperation Agreement. See Samir D. Parikh, Creditors Strike Back: The Return of the Cooperation Agreement, 73 Duke L.J. Online, 1 (2023); see also Barclays.

11 PitchBook II; WSJ.(/p

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