Wall Street banks rush to sell leveraged buyout debt as deals close
Banks with about $80 billion in leveraged buyout funding are pushing to get the debt off their books before market conditions deteriorate.
Bank of America Corp. began pricing debt interest in the $15 billion takeover of Citrix Systems Inc, one of the largest LBO financings of the past decade. And BofA and Citigroup Inc are leading a syndicate testing investors’ appetite for a $5.4 billion debt package to help fund Apollo Global Management Inc’s takeover of Tenneco Inc.
Leveraged debt markets have been losers this year, and more pain is likely after Wednesday’s inflation report all but assured a big rate hike coming from the Federal Reserve, but bankers see a window to make deals. Junk bond spreads tightened by around 50 basis points last week, according to data from the Bloomberg index. Leveraged loan prices have risen in recent days, but are still hovering around 92 cents on the dollar, the lowest since August 2020.
“It’s recognized that things aren’t going to improve anytime soon, which is why we’re seeing these LBO financings coming in now,” said Ken Monaghan, co-head of high yield at Amundi US. “The market is weaker today after the CPI print, but the tone has improved a bit over the past week, so banks are also looking to take advantage. There is demand for offers at the right level.
Bankers are also betting that investors will consider the lack of choice. The core lending market saw a handful of launches this week, including Apollo’s merger of food retailers Tony’s Fresh Markets and Cardenas Markets. The deal offered a spread of 700 basis points on the overnight secured funding rate and a price of 92 cents on the dollar.
Underwriters entered the last round of buyout funding — Deutsche Bank AG estimates about $80 billion in loans and bonds — months ago when markets were more stable. Since then, investors have fled the junk bond and leveraged loan markets as the Fed began raising rates and tightening liquidity to fight the worst inflation in four decades.
Today, deadlines for finalizing acquisitions are approaching, which could force banks to finance the transactions themselves unless they find investors in the market. And depending on the price of the debt when it’s sold – loans have recently been cut sharply – banks could face losses of up to hundreds of millions of dollars. But it may be their best option.
“If banks fail to price tranches of debt to fund repurchase agreements they have agreed to, they risk keeping them on their balance sheets,” said Nichole Hammond, senior portfolio manager at Angel Oak Capital. Advisors.
A deal led by Deutsche Bank and UBS Group AG shows that LBO participants will be creative in striking deals.
Banks launched an approximately $1 billion leveraged loan and junk bond offering to help fund the takeover of Cornerstone Building Brands Inc by Clayton, Dubilier & Rice, after the private equity firm investment assumed part of the debt. The planned funding consists of a $410 million leveraged loan, a $600 million secured high yield bond and Clayton Dubilier’s contribution of $464 million of “payment in kind” debt, a risky security which generally allows a company to pay interest with more debt. .
With higher rates ahead, transactions must scale quickly or face greater challenges.
“Until inflation breaks, I think any open windows will be fleeting, especially for LBO risk,” said Bill Zox, high yield portfolio manager at Brandywine Global Investment Management.
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