US banks are using the thaw in the markets to take “suspended loans” off their books

Wall Street banks are using thawing corporate debt markets to unload billions of dollars in loans tied to risky private equity buyouts, but many are still taking losses to strike deals with investors.

The debt sale earlier this month linked to its takeover of television ratings provider Nielsen has offered a reprieve to lenders including Bank of America and Barclays, which are desperate for ‘hanging’ deals that have piled up on their balance sheets this year due to a lack of investor appetite.

The $3.2 trillion market for riskier corporate bonds and leveraged loans has started to rev up in recent weeks after a long hiatus, paving the way for banks to consider selling debt to investors. However, confidence in the markets remains shaky and growing fears of a recession mean that many deals remain too risky for investors to touch, even as others are starting to pan out.

“The Hanged Man [loans] have clogged the system and held capital, but it is likely to be temporary,” said Peter Gleysteen, chief executive officer of asset manager AGL Credit Management. He added that the uncertainty in the global economy has “caused investors to stop, look and listen… There is a lot of capital available but it is not being used in the usual way”.

The bond and loan deals that banks have been stuck in were finalized late last year or early this year before markets were rocked by rising borrowing costs. Banks have pledged to finance acquisitions on much more generous terms than any company could currently find on the markets.

Last week, lenders led by Citigroup and Bank of America abandoned part of a planned $2.4 billion debt sale to finance the $7.1 billion takeover of auto parts maker Tenneco by Apollo Global Management, after steep discounts and double-digit yields failed to convince lenders. A few weeks earlier, a $3.9 billion debt offering to finance Apollo’s purchase of telecommunications group Brightspeed had been scrapped.

One lender called the Tenneco deal “a Hail Mary effort to see if [the banks] could capitalize on the recent market strength.” In the end, investors’ orders were insufficient.

Instead, banks have been fortunate to pick up interest in debt offerings from higher-quality rated companies, including those judged by investors to be better equipped to weather an economic slowdown. The banks were able to offload $2 billion of outstanding debt tied to the $16 billion Nielsen buyout, and are in the final stages of selling an additional $1.75 billion loan tied to the deal. The loan is finding solid demand and is expected to be finalized this week, according to people knowledgeable on the matter.

The Nielsen debt nonetheless brought mouth-watering returns to potential investors, with banks offering steep discounts to help move the bonds off their books. Even after the bond and loan offerings are completed, the banks will still hold billions of dollars of Nielsen debt.

Other debt deals, especially those not related to new leveraged buyouts, have swept through the market. Goldman Sachs bankers who took out a $1.7 billion loan for the F1 motor racing series last week were able to lock in lower-than-expected borrowing costs for the company after investors phoned to large orders.

The company, which has a double-B rating from S&P Global, nearing the top of the agency’s speculative rankings, issued the loan with a yield of about 7.9%, paying 3.25 percentage points above a key benchmark for it. type of debt. When bankers began marketing the loan, the yield was expected to reach 8.5%.

Bar chart of US new leveraged loan and junk bond issuance, by year ($ billion) showing junk bond and loan sales slipping to lowest level since financial crisis

Recent lending is “helping debunk the myth that there is this ton of high-yield stocks [debt] that can’t clean up the market,” according to Andrzej Skiba, head of US fixed income at RBC Global Asset Management. “There is a price for everything. What is true is that people have reservations about particularly cycle-sensitive and ongoing credit because of the strategy.”

The more uncertain mood in credit markets represents a change from earlier in the year. Central bank stimulus at the height of the coronavirus crisis had ignited an era of cheap money that flowed into early 2022, spurring enthusiasm for negotiating and refinancing existing debt as interest rates were close to zero.

But bonds and equities have come under severe pressure since then, feeling the effects of high inflation and rising interest rates. In turn, fears have intensified that the US Federal Reserve and its global counterparts will tighten monetary policy in a protracted economic slowdown as they strive to curb rapid price growth.

A recession would potentially mean reduced consumer spending even as companies face a dramatic escalation in borrowing costs that has already effectively locked many out of the capital markets.

Sales of junk-rated US bonds plummeted this year to their lowest levels since the 2008 global financial crisis, generating proceeds of just $101 billion, according to data from Refinitiv. Last year, the issuance was $464 billion.

Leveraged loan sales have also slowed dramatically after an exceptional 2021. And the debt that has been able to attract willing investors over the past couple of months has tended to be single- and double-B rated, with borrowers often having to provide more investor protections in the documents governing their obligations and loans.

Adam Abbas, co-head of fixed income at Harris Associates, said markets had “effectively” closed for triple-C rated companies looking to raise debt, raising the specter of “a natural cycle of defaults.”

Debt financing has been a central component of private equity acquisitions for years, supporting the acquisition strategies of buyout companies. But it also forms a vital source of funding for businesses of all sizes around the globe as they go about their day-to-day operations, from tech and media giants to high-end retailers.

At the same time, underwriting corporate debt sales has proved highly profitable for banks during hot trading periods, when there are many willing buyers and sellers in the market. But it has become a major headache and a drain on lenders’ coffers as investors have stayed on the sidelines this year, fearful of further volatility to come.

“I don’t think we’ve seen the last of this volatility, especially when you think about inflation, the capital R word [recession]broader economic uncertainty and all that is happening in Europe,” said Cade Thompson, head of US debt capital markets at KKR. “We seem to be stuck here for a while.”

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