Banks Sit on Billions of LBO Financings as Demand for Debt Falls

(Bloomberg) -- Banks across Europe and the U.S. committed to lend tens of billions of dollars for leveraged buyouts and acquisitions. Now they need to find buyers for the debt, and demand is relatively weak. 

A group of lenders including Credit Suisse Group AG, Bank of America Corp., and Goldman Sachs Group Inc. is committed to provide around $15 billion of financing for the leveraged buyout of Citrix Systems Inc., a maker of remote-work software, and is expected to try to offload that exposure as soon as next month. That's just one of the more than $37 billion of pending debt deals in Europe, and $38 billion of coming leveraged loans in the U.S., figures that both include at least some Citrix debt, according to data from Bloomberg and Deutsche Bank AG respectively.      

Selling debt isn't impossible now, but bond and loan markets are less active than they've been in years, and a growing number of offerings are being delayed or withdrawn altogether. Concerns that war risks are intensifying roiled markets around the globe, pushing the spread on the benchmark U.S. high-grade CDS index, which widens as risk rises, 3.3 basis points higher to 74.6 as of 10:35 a.m. New York time on Friday.

Read more in this week's Credit Brief: When Music Stops for LBO Debt

“The opportunistic refinancing trade is on the back burner until things recoup,” said Richard R.S. Smith, head of leveraged capital markets at Mizuho Americas. “The private equity trades, the underwritten trades, will time it accordingly.”

Europe's debt markets have been hit particularly hard, with sales of junk bonds frozen for the last three weeks, but the U.S. hasn't been immune to difficulty either. Companies that for years have been able to borrow for virtually anything are finding that the era of easy money is coming to an end, with rate hikes expected in the U.S. this year, and potentially Europe as well. 

Demand for loans should rise again at some point, because money managers are looking to bundle that debt into bonds called collateralized loan obligations, said Christoph Zens who heads Tikehau's CLO business in the U.K. There are probably around 70 to 80 of these deals being put together now in Europe, he said.  

“There are quite a few banks sitting on paper waiting to be syndicated but no one wants to go first and find what the demand level is,” Zens said. It might take two weeks, six weeks, or more depending on the broader macroeconomic situation, he said.

Europe Risks

The $37 billion of pending debt deals in Europe include both loan and bond sales. Banks led by Barclays Plc have already lost money and been stuck with more than $300 million in loans from the Covis Pharmaceuticals Inc. deal in February that struggled for weeks to attract investors. Lenders don't want a repeat.

New M&A

Despite Russia's invasion of Ukraine, acquisitions and buyouts are still happening. A consortium led by Macquarie Group Ltd. and KKR & Co. is in advanced talks to buy the U.K. electricity distribution business controlled by Hong Kong tycoon Victor Li, a deal that could value UK Power Networks at as much as 15 billion pounds ($20 billion).

In the U.S. there hasn't been a dramatic decline in discussions on new buyouts or acquisitions, though there may be fewer auction processes making it all the way to the finish line, said Trip Morris, head of leveraged finance at Wells Fargo & Co. 

“Our activity level on looking forward to potential transactions has really not abated over the last few weeks,” he said. “It's obviously become a little bit more difficult to figure out how to structure and price a transaction.”

Elsewhere in credit markets:

Americas

One borrower moved forward with a new investment-grade bond deal on Friday after three days of relative calm in financial markets allowed floodgates to open with more than $50 billion in fresh debt. Next week's preliminary outlook is for around $40 billion of issuance.

• U.S. junk bonds headed for the first back-to-back weekly gains since December, though no new deals were announced on Friday
• Goldman Sachs and JPMorgan have been purchasing beaten-down company bonds tied to Russia in recent days, as hedge funds that specialize in buying cheap credit look to load up on the assets
• For deal updates, click here for the New Issue Monitor
• For more, click here for the Credit Daybook Americas

EMEA

No issuers tapped the market on Friday, with the weekly tally standing at nearly 16 billion euros ($17.6 billion), the lowest of the year so far.

• The drought in leveraged debt also continues with no junk-rated company in the market
• No CLO has priced since Russia's invasion of Ukraine last week
• A consortium led by Macquarie Group Ltd. and KKR & Co. is in advanced talks to buy the U.K. electricity distribution business controlled by Hong Kong tycoon Victor Li, in what could be one of the sector's largest deals this year, people familiar with the matter said

Asia

Credit investors are rushing to protect their portfolios to an extent not seen in years as Russia's invasion of Ukraine adds to surging inflation risks.

• The cost to insure investment-grade debt in Asia is set to widen for a ninth week, a record stretch. Credit-default swap prices rose another one to two basis points Friday after Ukraine said Russia attacked a nuclear power plant. Asian junk dollar bonds were poised to hit a record low after the news.
• Chinese high-yield dollar bonds dropped 2-5 cents on the dollar Friday, according to credit traders, as developers continued to slide alongside stock weakness.
• Shimao Group Holdings Ltd. has obtained a three-month grace period for payments due on about 6 billion yuan ($950 million) of high-yield trust products, according to people familiar with the matter.

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