Wall Street banks looking to finance lucrative buyouts as dealmaking shows signs of recovery have one less obstacle: they’re off the hook from selling a large slug of worrisome debt. 

Tegna Inc. officially terminated its proposed buyout by hedge fund Standard General LP after failing to win regulatory approval. That means banks are no longer obligated to fund around $8.2 billion of debt they had promised.

Lenders including Royal Bank of Canada, Goldman Sachs Group Inc. and Bank of America Corp. had underwritten the financing in early 2022. Since then credit conditions have tightened and yields have spiked, especially for higher-risk firms like Tegna, which operates dozens of U.S. television stations and would almost certainly see advertising revenue suffer in an economic downturn.

Banks would have likely been forced to sweeten the deal with higher yields or better pricing — to the point of potentially suffering losses — to offload the debt from their balance sheets.

The breakdown of Tegna’s buyout clears the path for banks to fund more deals coming down the pike as green shoots emerge in M&A activity. 

“Private equity deals and M&A are still limited. But I think it’s coming, I do see it breaking loose,” said Kristopher Ring, partner at law firm Goodwin Procter.

The timing is critical as banks have been grappling with a decline in the most profitable types of financings. Leveraged loan issuance, excluding refinancings, has plunged to $18.5 billion this year as of early May, an 82 percent drop compared to the same period last year, according to research by JPMorgan Chase & Co. Junk-bond sales, meanwhile, slipped nearly 30 percent to $22.5 billion, according to JPMorgan. 

Goldman Sachs declined to comment. Representatives for RBC and Bank of America didn’t respond to requests for comment. Tegna’s management team and board of directors are “actively reviewing the return of additional excess capital that accumulated during the pending merger,” according to a press release. A representative declined to comment beyond that statement. 

Hung Debt

Banks have also been competing with private credit firms. These direct lenders had swooped in to fill a gap left by banks that were struggling with around $40 billion of risky loans and bonds stuck on their balance sheets at the start of the year as investors shunned risk in the wake of the Federal Reserve’s aggressive rate hikes.

The private credit market financed 94 percent of buyouts by number and 70 percent by dollar volume in the first quarter, according to a report from Carlyle Group Inc. that cites data from LCD PitchBook. The tides have started to turn, however, as banks have stepped up efforts to clear major portions of hung debt this year. 

In April, banks led by Goldman Sachs offloaded the riskiest portion of debt from last year’s buyout of Citrix Systems Inc. A group of lenders led by Bank of America also sold a $650 million junk bond for Nielsen Holdings in February that will help the company refinance a loan that banks had been stuck with.

Still, debt from Apollo Global Management Inc.’s acquisitions of auto-parts maker Tenneco Inc. and telecom provider Brightspeed linger on the balance sheets of large lenders. Banks have also not managed to offload debt from Elon Musk’s buyout of Twitter Inc. 

“Most of the banks are out from under the deals that were hung last year. They are ready to move on,” Goodwin Procter’s Ring said. “But they are still pricing a little too wide for private equity sponsors, who prefer private credit.”