Wall Street banks are using a thaw in corporate debt markets to offload billions of dollars in loans tied to risky private equity takeovers, but many are still taking losses to strike deals with investors.
The debt sale earlier this month linked to the takeover of TV ratings provider Nielsen has offered a reprieve for lenders, including Bank of America and Barclays, who are desperate to settle the “stuck” transactions that have piled up on their balance sheets. this year due to a lack of investor appetite.
The $3.2 billion market for riskier corporate bonds and leveraged loans has started to gather momentum in recent weeks after a long lull, clearing the way for banks to consider selling off some of the debt to investors. However, confidence in the markets remains fragile and growing recession fears mean that many deals remain too risky for investors to touch, even as others start to materialize.
” The hanged man [loans] have clogged the system and withheld capital, but this is likely to be temporary,” said Peter Gleysteen, managing director at asset manager AGL Credit Management. He added that the uncertainty in the global economy had “caused investors to stop, watch 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 blocked were done late last year or early this year before markets were rocked by soaring borrowing costs. The banks have pledged to fund the takeovers on terms that are far more generous than a company could currently find in the markets today.
Last week, lenders led by Citigroup and Bank of America dropped part of a planned $2.4 billion debt sale to fund Apollo Global Management’s $7.1 billion buyout of the coinmaker. Tenneco automobiles, after deep discounts and double-digit returns failed to woo creditors. A few weeks earlier, a $3.9 billion debt offer to finance Apollo’s purchase of telecommunications group Brightspeed had been dropped.
One lender called the Tenneco deal “a Hail Mary effort to see if [the banks] could capitalize on recent market strength. In the end, investor orders were insufficient.
Instead, banks have had a chance to drum up interest in higher-quality corporate debt offerings, including those deemed by investors to be better equipped to weather an economic downturn. The banks were able to offload $2 billion in stranded debt related to the Nielsen takeover for $16 billion, and they are set to sell another $1.75 billion loan tied to the deal. The loan is in high demand and is expected to be finalized this week, according to people briefed on the matter.
Nielsen debt nonetheless carried tempting returns for potential investors, with banks offering steep discounts to help get the bonds off their books. Even after bond and loan offerings end, banks will hold billions of dollars in Nielsen debt.
Other debt deals, especially those unrelated to further leveraged buyouts, rushed 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 in for orders important.
The company, which has a double-B rating from S&P Global – near the top of the agency’s speculative rating – issued the loan with a yield of around 7.9%, paying 3.25 percentage points above a key benchmark for this type of debt. When bankers started marketing the loan, the yield was expected to be 8.5%.
Recent borrowing ‘helps dispel the myth that there are a ton of high yield bonds [debt] it can’t balance the market,” said 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 loans that are particularly sensitive to the economic situation and those in flow due to strategy.
The more hesitant mood in credit markets represents a change from the early months of the year. The central bank’s stimulus at the height of the coronavirus crisis had sparked an era of cheap money that poured in in the early months of 2022, boosting enthusiasm for deals and refinancing of existing debt as interest rates were close to zero.
But bonds and equities have since come under heavy pressure from high inflation and rising interest rates. In turn, fears have intensified that the US Federal Reserve and its global peers are tightening monetary policy amid a prolonged economic downturn as they seek to rein in rapid price growth.
A recession would potentially mean a cut in consumer spending just as businesses face a dramatic escalation in borrowing costs that has already effectively forced many people out of financial markets.
Sales of gold-listed U.S. bonds have fallen this year to their lowest level since the 2008 global financial crisis, generating proceeds of just $101 billion, according to Refinitiv data. Last year, emissions amounted to $464 billion.
Leveraged loan sales have also slowed dramatically after a bumper 2021. And the debt that has been able to attract willing investors over the past two months has tended to be single- and double-B rated, with borrowers often having to provide stronger investor protections in the documents that govern their bonds and loans.
Adam Abbas, co-head of fixed income at Harris Associates, said markets were “effectively” closed for triple-C rated companies seeking to raise debt, raising the specter of a “natural default cycle”.
Debt financing has been a central part of private equity acquisitions for years, supporting the acquisition strategies of buyout companies. But it is also an essential source of funding for companies of all sizes across the world in their day-to-day operations, from tech and media giants to high street retailers.
At the same time, underwriting corporate debt sales has proven to be extremely lucrative 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’ own coffers as investors have stayed away this year for fear of further volatility to come.
“I don’t think we’ve seen the end of that volatility, especially when you think about inflation, the big 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 feel like we’re a bit stuck here.”
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