Banks sitting on about $80 billion in leveraged buyout financing are pushing to get the debt off their books before market conditions deteriorate.
Bank of America Corp. has begun gauging interest in debt for the $15 billion buyout of Citrix Systems Inc., one of the largest LBO financings of the past decade. And BofA and Citigroup Inc. are leading a syndicate testing investor appetite for a $5.4 billion debt package to help fund Apollo Global Management Inc.’s buyout 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 increase coming from the Federal Reserve, but bankers see a window to get deals done. Junk bond spreads tightened by about 50 basis points in the past week, according to Bloomberg index data. Leveraged loan prices have ticked up in recent days, though still hover near 92 cents on the dollar, the lowest since August 2020.
“There’s a recognition that things aren’t going to get any better any time soon, so that’s why we’re seeing these LBO financings come now,” said Ken Monaghan, co-head of high yield at Amundi US. “The market is weaker today after the CPI print but the tone had improved a bit in the past week, so banks are also looking to take advantage of that. There’s demand for deals at the right level.”
Bankers are also betting investors will consider the lack of choice. The primary loan market had a handful of launches this week, including Apollo’s merger of grocery retailers Tony’s Fresh Markets and Cardenas Markets. The deal offered a spread of 700 basis points over the Secured Overnight Financing Rate and a price of 92 cents on the dollar.
Underwriters committed to the latest round of buyout financing — Deutsche Bank AG estimates about $80 billion in loans and bonds — months ago, when markets were more stable. Since then, investors have fled junk bond and leveraged-loan markets as the Fed began raising rates and tightening liquidity to combat the worst inflation in four decades.
Now, deadlines to complete acquisitions are looming, which may force banks to fund deals themselves unless they can find investors in the market. And depending on the price of the debt when sold — loans have been coming at steep discounts lately — the banks are at risk of losses running into the hundreds of millions of dollars. But that may be their best option.
“If banks don’t successfully price the debt tranches to finance buyout deals they agreed to, they may be stuck holding them on their balance sheets,” said Nichole Hammond, a senior portfolio manager at Angel Oak Capital Advisors.
A deal led by Deutsche Bank and UBS Group AG shows that LBO participants will get creative to get deals done.
The banks launched a roughly $1 billion leveraged loan and junk bond offering to help fund the buyout of Cornerstone Building Brands Inc. by Clayton, Dubilier & Rice, after that private equity firm took on some of the debt. The planned financing 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 that typically allows a company to pay interest with more debt.
With higher rates coming, deals must move fast or face greater challenges.
“Until inflation breaks I think any open windows will be fleeting, especially for LBO risk,” said Bill Zox, a high-yield portfolio manager at Brandywine Global Investment Management.
Elsewhere in credit markets:
Americas
The US consumer price index rose 9.1 percent from a year earlier, the largest gain in inflation since the end of 1981, causing US Treasury yields to rise and fixed-income securities prices to fall on anticipation the Federal Reserve will increase overnight rates by at least 75 basis points this month.
- Both borrowers that were weighing US high-grade bond sales Wednesday stood down as volatility flared following the red-hot inflation report
- The Bank of Canada hiked interest rates by a full percentage point, a surprise move that supercharges efforts to withdraw stimulus before four-decade-high inflation becomes entrenched
- A debt default by Graceland, the Elvis Presley mansion turned tourist attraction, shows why investors in other venues financed by municipal bonds may one day be singing the blues
- Investors withdrew from fixed income mutual funds in the week ended July 6 for the 21st straight week of outflows, according to the Investment Company Institute
EMEA
The possibility Russia will shut off gas supplies to Europe is pushing up a gauge of future defaults for companies already battered by runaway inflation, the withdrawal of central bank support and the prospect of recession.
- On their current trajectory, the safest euro-denominated company bonds are set for their best month in two years and their first monthly gain in eight. There’s plenty to suggest the rally will stumble
- Two issuers brought two tranches to Europe’s primary market on Wednesday, worth a total of 1.5 billion euros
- The prospect of slower economic growth is of more immediate concern to credit analysts than euro/dollar parity, potentially pushing spreads hundreds of basis points wider from levels already elevated due to central bank tightening amid soaring inflation
- Chaos continues in the airline industry, sending Heathrow Airport’s sterling bond to record lows of around 83 pence
- $9 billion of subordinated euro bonds sold by Swedish property companies could suffer further price drops after hitting record lows last month
- Concerns swirl around whether the companies will call the hybrids at the first call date, going against investor assumptions of a high call probability
Asia
A sell-off in Chinese developers’ high-yield dollar bonds continued on Wednesday as fresh signs of trouble emerged, fueled by a regulatory crackdown on developers’ debt growth, the consequential slump in new-home sales and the prospects of more lockdowns. The sell-off has spread up the quality curve.
- An outsized rate hike by the Bank of Korea drove yields on commercial paper in South Korea to an eight-year high, prompting the government to make an extra $4.6 billion available to buy lower rated corporate debt
- India’s bond market picked-up on Wednesday with at least five issuers seeking bids for as much as 34 billion rupees of local currency notes
