Happy Monday. Here’s what we’ve got today…

• A look at the emergence of synthetic PIK loans

• Plus, Macy’s take-private is a no-go

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Synthetic PIK, the latest in financial innovation:

In recent months, some private credit firms have begun pitching a new arrangement marketed as a synthetic payment-in-kind (PIK) note.

Traditional PIK structures, which allow borrowers to defer cash interest payments by adding to the principal balance, have been a go-to offering for private credit and one of its differentiators in the competition to beat out less flexible broadly syndicated offerings from banks. However, funds often face limitations to their PIK lending imposed by their own debt financing sources.

The synthetic structure is a novel way to sidestep these constraints while achieving a similar economic outcome. In practice, it’s not much different for the borrower than a traditional PIK note — rather than a private equity-led innovation, the emergence of the synthetic PIK is largely a function of private credit creativity.

Mechanically, the synthetic structure involves two separate debt facilities: the primary loan and an accompanying delayed-draw term loan (DDTL), also known as the synthetic interest payment facility (SIPF).

When interest payments are due on the primary facility, the borrower draws on the DDTL (the SIPF) and uses those proceeds to make the primary facility cash interest payment.

The incremental outstanding principal for that interest payment then accrues to the DDTL rather than the primary loan, as would be the case in a typical PIK. This arrangement allows the borrower to defer the actual cash outlay, as they would in a traditional PIK structure, while technically maintaining cash interest payments.

For private credit firms, the synthetic PIK lets them offer flexibility to borrowers without the risk of running afoul of PIK exposure limits set by their own lenders — typically imposed at the portfolio level to maintain the quality of the collateral pool backing the private credit fund's borrowings.

The exact terms of these synthetic PIK deals can vary significantly. In some cases, only a portion of the interest may be funded through the DDTL. The pricing, fee arrangements, and other terms of the DDTL may also differ from the primary facility.

The structure has received some criticism over its potential to mask the true health of private credit funds and their underlying assets. Traditional PIK loans can be riskier as repayment is delayed relative to a cash-pay loan. Because of that, some critics argue that private credit valuations for PIK facilities should be marked meaningfully lower than they are.

With a general uptick in the scrutiny of private credit valuations, the synthetic PIK development adds fuel to the fire in two primary ways: (1) A greater percentage of the portfolio can now be comprised of potentially riskier PIK assets, which in turn can obfuscate trouble within the portfolio and even keep valuations at par for credits which would otherwise be non-performing; and (2), synthetic PIK arrangements may even mask the true extent of PIK debt within a lender’s portfolio, beyond just skirting around financing restrictions.

On the second point, third-party valuation firms (typically employed by the fund itself) may not always have full visibility or awareness of instances in which synthetic PIKs are in play. From their perspective, the arrangement may just appear to be a traditional cash-interest loan to a borrower who happens to also be drawing on their DDTL.

• Alphabet (Nasdaq: GOOG) is in late-stage talks to acquire Wiz, a four-year-old cybersecurity startup, for around $23 billion, per the Wall Street Journal.

• Cleveland-Cliffs (NYSE: CLF) agreed to acquire Stelco Holdings (TSX: STLC), a Canadian steel producer with operations in Ontario, for C$3.85 billion.

• Macy's (NYSE: M) announced that it’s ending talks over a take-private deal with Arkhouse Management and Brigade Capital Management.

• Cinven has hired Goldman Sachs and Fenchurch Advisory to sell Viridium Group, a German life insurance consolidator with €67 billion in assets under management, which is drawing early interest from Apollo Global Management's Athora, Blackstone-backed Resolution Life, and Sixth Street, per Bloomberg.

• Transportation Equipment Network, North America's second-largest full-service trailer lessor backed by I Squared Capital, raised over $600 million from Mubadala Investment Company, Qatar Investment Authority, and other co-investors.

• Blackstone invested in Air Control Concepts, a company that partners with commercial HVAC equipment manufacturers, joining existing investor Madison Dearborn Partners.

• Equinix (Nasdaq: EQIX) is considering the sale of a minority stake in its Hong Kong data centers, and has hired Citigroup to run a process which could fetch around $2 billion, per Reuters.

• Airbus and Thales are in preliminary discussions over a potential agreement involving their satellite businesses. Possible scenarios include a full merger, joint venture, or division of activities by specialty, La Tribune.

• Vista Equity Partners has hired Goldman Sachs as it explores exit options for Sonatype, a provider of software supply chain management tools, which could be valued at more than $1.5 billion, per Reuters.

• Seviora Holdings, owned by Temasek, will acquire a minority stake in ADM Capital, a Hong Kong-based private credit manager.

Portfolio Company Add-Ons

• CJ Pony Parts, backed by Century Park Capital Partners, acquired American Powertrain, a provider of transmission kits for classic vehicles.

• OneStream, a KKR-backed corporate performance management software provider, is hoping to raise up to $465.5 million in its Nasdaq IPO, offering 24.5 million shares priced between $17-$19, or a market value of up to $4.4 billion.

• Concentra Group, a Select Medical-owned occupational health services provider, is hoping to raise up to $585 million in its NYSE IPO, offering 22.5 million shares priced between $23-$26, or a market value of up to $3.3 billion.

Tech, Vertical SaaS, & Misc. Enterprise

• Endor Labs, a software supply chain security platform, raised $70 million in Series A funding led by Lightspeed Venture Partners, with participation from Coatue, Dell Technologies Capital, and Section 32.

• Alvys, a logistics and supply chain management platform, raised $20.5 million in Series A funding led by Titanium Ventures, with participation from Picus Capital, RTP, and Bonfire.

• Adaptive, a financial automation platform for the construction industry, raised $19 million in Series A funding led by Emergence Capital, with participation from Andreessen Horowitz, Definition, Exponent, 3kvc, and Box Group.

• LegalFly, a legal AI startup, raised €15 million in Series A funding led by Notion Capital, with participation from Redalpine and Fortino Capital.

• Instinct Digital, a London-based provider of investment reporting and communications solutions, raised £5 million in Series A funding led by AlbionVC.

Fintech

• Partior, an interbank payment network for real-time clearing and settlement, raised $60 million+ in Series B funding led by Peak XV Partners, with participation from Valor Capital Group, Jump Trading Group, JPMorgan, Standard Chartered, and Temasek.

• Tapi, an Argentine payment processor for Latin American platforms, raised $22 million in Series A funding led by Kaszek, with participation from Andreessen Horowitz.

• Caliza, a developer of real-time cross-border payment infrastructure for Latin America, raised $8.5 million in new funding led by Initialized, with participation from Abstract Ventures, Class 5 Global, Digital Currency Group, Kraynos Capital, New Form Capital, and Quona.

• Haruko, a digital asset investment management platform, raised $6 million in Series A funding co-led by White Star Capital's Digital Asset Fund and MMC Ventures.

Industrials, Greentech, & Other

• Halo Industries, a Santa Clara-based creator of laser manufacturing technology for semiconductors, raised $80 million in Series B funding from the U.S. Innovative Technology Fund, 8VC, and SAIC.

• Standard Bots, a robotics automation startup, raised $63 million in Series B funding led by General Catalyst, with participation from Amazon Industrial Innovation Fund and Samsung Next.

• 44.01, a carbon sequestration startup, raised $37 million in Series A funding co-led by Equinor Ventures and Shorooq Partners, with participation from Air Liquide Venture Capital, Alumni Ventures, Amazon's Climate Pledge Fund, Climate Investment, Innovation Development Oman, Planet A Ventures, Salica Oryx Fund, Siemens Financial Services, Sumitomo Corporation, and Breakthrough Energy Ventures.

• Caro Investors Management, founded by Careina Williams, launched with a strategic partnership with TPG NEXT, which will serve as an anchor investor for the firm's inaugural real estate private credit strategy.

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