Analysis-US and European banks could lose more than $5 billion from risky buyout loans
By Saeed Azhar, Anirban Sen and Davide Barbuscia
NEWYORK – Major US and European banks face tougher times in the riskiest parts of the lending market.
The biggest U.S. lenders, including Bank of America and Citigroup, wrote down $1 billion in the second quarter on leveraged and bridge loans as rising interest rates made it harder for banks offload debt from investors and other lenders.
The pain has also spread across the Atlantic, after European lenders such as Deutsche Bank and Credit Suisse reported losses for such exposure.
Major U.S. and European banks are on track to lose another $5 billion to $10 billion over the next few quarters on the leveraged loans they have pledged to underwrite, bankers and analysts say.
Bank of America is one of the most exposed to such writedowns because it is funding at least three large buyouts at a time when the LBO The market stalled, bankers and analysts said. Bank of America declined to comment.
In the leveraged loan market, banks typically provide high-risk loans to investors who want to buy businesses using borrowed funds. As the market slowed, banks reacted with tighter terms for new loans while struggling to distribute existing loans to other lenders and institutional investors. Buyers are looking for more favorable terms.
“If a bank wants to offer a market deal to investors, they will have to offer it at a discount,” said Dan DeYoung, portfolio manager of high-yield and leveraged loans at fund manager Columbia Threadneedle.
Goldman Sachs, Bank of America, and Barclays have been among the top three bookrunners for leveraged buyout financing for leveraged loans and bonds since Q4 2021 in the U.S. and Europe, according to data. data from Dealogic.
Goldman Sachs and Barclays declined to comment.
Banks generally sell loans rather than hold them. They want to distribute about $80 billion to $100 billion in US and European leveraged loans to other lenders and investors in September and October, a delay in the process due to market disruption, according to three bankers involved in the market . If sold at a discount, underwriters would have to swallow losses, bankers said.
The market has been troubled by the Federal Reserve’s plan to tighten monetary policy to fight inflation, which has triggered a strong sell-off in fixed-income assets this year.
The yield was spread over ICE The BofA US High Yield Index, a commonly used benchmark for the junk bond market, hit a two-year high of around 600 basis points in July. It tightened to 425 basis points, but is still up 120 basis points since the start of the year.
“We all underestimated the size of the inflation problem and how aggressively the Fed was going to have to act,” said a senior banker in New York.
“A number of commitments we made in the fourth quarter, as well as January and early February, were quickly underwater because rates were so aggressive,” he said.
The biggest deals include the Bank of America-led financing for a $16.5 billion buyout of software company Citrix Systems Inc by affiliates of Elliott Management and Vista Equity Partners. The lender is also funding Apollo’s deal to buy Tenneco Inc, which had a business valuation of about $7.1 billion including debt.
Bank of America is also among the banks backing billionaire Elon Musk’s $44 billion acquisition of Twitter Inc, a deal shelved after Musk stepped down. Twitter sued to force him to close the deal.
For some, market uncertainty warrants a wait-and-see approach.
“Debt committed to the system must be placed and equity investors … are cautious, which limits LBO activity,” said Anu Aiyengar, global co-head of mergers and acquisitions at JP Morgan, referring to leveraged buyouts.
The price of existing loans on the S&P Leveraged Loan Index fell to a two-year low in July, according to data from Refinitiv. Although it has pared losses, the index’s decline this year reflects broader pressure in debt markets and growing fears that Fed monetary tightening could put pressure on riskier borrowers. Two exchange-traded funds that track leveraged loans, the SPDR Blackstone senior loan ETFs and the senior loan from Invesco ETFsfell 4.9% and 3% respectively since the start of the year.
“The availability and cost of debt financing for sponsors has become a challenge in some situations, particularly in syndicated loan markets,” said Steve Arcano, global head of dealings practice for law firm Skadden, Arps, Slate, Meagher & Flom. LLPon the challenge facing buyout companies.
The credit market is experiencing a wave of revaluation after the Fed’s rate hikes, according to Minesh Patel, senior director at S&P Global Ratings.
“The real crux of the matter is that markets have changed,” Patel said. Borrowing rates become more expensive for companies with lower credit ratings, he said, citing an S&P study he co-authored.
Leveraged finance has been lucrative for big banks in recent years, so expected losses won’t be too alarming, said Marc Cooper, managing director of Solomon Partners, a boutique investment bank in New York.
The big banks are “going to be crushed” in the latest bout of volatility, but “they’re big boys,” he said. “They’ll take their radiation and move on.”