Barclays Plc had the deal seemingly locked up.

Along with a trio of smaller lenders, the bank had agreed to arrange a $1.1 billion loan for ACProducts’ buyout of a unit of rival Masco Corp. While the terms of the financing weren’t quite as good as the kitchen-cabinet maker’s private equity owners had hoped, getting a signed commitment from the banks allowed the company to finally announce the deal in mid-November.

Then a couple of months later, something odd happened: a new -- and markedly better -- funding proposal landed in front of the buyout firm’s executives. The terms were so much better, in fact, that they would wind up coming out ahead even though walking away from the Barclays deal would trigger millions of dollars in breakup fees, according to people with knowledge of the matter. They said yes.

The last-minute lender wasn’t Bank of America Corp. or JPMorgan Chase & Co. or any of Barclays’ other traditional rivals. It was KKR & Co., a giant in the world of private equity that is normally on the receiving, not giving, end of deals in the $1.2 trillion U.S. leveraged loan market. And the decision to undercut Barclays on the ACProducts loan underscores just how cutthroat KKR and other private-equity firms have become in recent years as they look to play a bigger role in the lending market.

For KKR, its credit-investing and debt underwriting business has increasingly put it in direct competition with established Wall Street players, especially in the business of providing buyout financing.

Representatives from Barclays, KKR and American Industrial Partners, which owns ACProducts, declined to comment on the transactions.

Breakage Fee

KKR and other firms like it are rushing to build out private lending businesses, looking to capitalize on a shift away from Wall Street banks they say is just getting started.

The KKR deal was especially surprising to market watchers because Barclays already had an established relationship with ACProducts and its sponsor.

The bank had lined up about $400 million of financing for a separate acquisition the Texas-based company made about a year ago. While Barclays was forced to take about half of that debt on its balance sheet as syndicated loan buyers balked, the bank had been willing to lend to the company when others wouldn’t. Its M&A advisers also worked with ACProducts on the Masco acquisition.

In the end, Barclays didn’t walk away empty handed. In fact, thanks to the so-called alternative-transaction fee, the bank is still getting around half of the money it would have otherwise collected for underwriting the deal -- without having to go out and sell it to investors, one of the people said, asking not to be identified because the details are confidential.

The loan arranged by KKR will also repay ACProducts’ existing debt, getting Barclays out of the portion of the original financing it was never able to offload.

The KKR package had several advantages over the Barclays-led deal. For starters, it would eliminate the need for a bond, which would have burdened the company with additional disclosures and been more expensive to repay in the event American Industrial Partners wanted to sell the company.

It also offered a lower cost of capital compared to the rates at which the banks had agreed to backstop the deal, and didn’t come with the additional investor protections that direct lenders often require, the people said.

KKR’s credit division and some co-investors have also agreed to take around three-quarters of the loan themselves, leaving only a small portion of the financing exposed to the ebb and flow of the syndicated market, one of the people said.

The unitranche loan maturing in 2025 may pay 6.5 percentage points over the London interbank offered rate. Investors have until Feb. 18 to participate in the offering.