Banks make last-ditch push to sell buyout loans before August lull

BANKS are making a last ditch effort to offload US leveraged loans they've committed to fund, taking advantage of rising prices before an August lull.

On Tuesday (Jul 26), Morgan Stanley launched the sale of a US$500 million term loan to help finance Avient's acquisition of Royal DSM's fibre business, according to people with knowledge of the matter who asked not be identified. On Monday, a group of banks led by Credit Suisse Group and Barclays launched a US$1.65 billion sale for private equity firm Cinven's buyout of Bayer's pest-control unit.

The sales are coming as secondary loan prices have improved nearly 2 US cents on the dollar since the beginning of July, closing at 93.68 US cents on Monday, according to the S&P/LSTA Leveraged Loan Price Index. Banks are offloading debt that they're sitting on, before the usual market slowdown that accompanies August and clearing the path for several large deals to potentially land after the US Labour Day holiday in early September.

"I'm sure they're thinking 'OK, the markets rallied, and secondary market loan and bond inventories are lighter,'" said Ken Monaghan, co-head of high yield at Amundi US. "'Let's see if we can make use of this lighten up on our exposure.'"

Fears over an imminent recession triggered a selloff in risky debt and left banks holding billions of committed debt financing with terms underwritten before prices plummeted. The leveraged buyout financing business cost the biggest US banks at least US$1.3 billion in the second quarter, and more such losses are likely on the way from their European counterparts, who post earnings this week.

Lenders have about US$40 billion in loans and US$30 billion in high-yield bonds left to clear from their balance sheets, according to an estimate last week by Deutsche Bank's investment bank. Several large buyout deals, such as the US$15 billion debt sale for the buyout of Citrix Systems and the US$5.4 billion buyout financing for Apollo Global Management's acquisition of Tenneco, have been postponed until after the Labour Day holiday.

At the same time, banks are making changes to financing plans for deals like Citrix, in order to successfully sell the debt. Debt markets have been tricky for issuers and investors alike to navigate this year, as the Federal Reserve looks to tame inflation without triggering a recession.

"Unlike 2020 or 2021, in particular, where the market was pretty much open for the entire year, it's going to go in fits and starts here probably for the remainder of this year," said Amundi US's Monaghan.

Elsewhere in credit markets:

SEE ALSO

Central banks to blame for inflation, former RBNZ chief says

Europe's banks brace for bumpy ride after cheap money decade

Be prudent, Chinese regulator urges banks as downturn bites

Americas

The Federal Reserve's interest rate hikes are recreating the market conditions that helped mortgage investor Michael Vranos make his fortune in the early 1990s. Now, he is betting the same trades will help him win again.

• 3M has placed its Aearo Technologies unit in Chapter 11 bankruptcy in a bid to resolve sprawling litigation brought by US military veterans over allegedly faulty combat earplugs.
• UBS Group shares slumped after weaker-than-expected profit in the second quarter, as the global market sell-off kept wealthy clients on the sidelines and institutional investors pulled funds.

EMEA:

Europe's primary bond market failed to maintain Monday's momentum with the State of Berlin offering the day's only new issue, a 500 million euro 10-year note.

• Ukraine's plan to freeze foreign-bond payments to give it some financial breathing space could trigger payouts for investors on US$2.4 billion of default insurance contracts.
• Private equity firm BC Partners is financing its acquisition of a majority stake in packaging firm Fedrigoni with a bridge loan provided by a group of 7 banks.

Asia:

Asia's primary dollar bond market came to a halt on Tuesday, as investors sat on cash to avoid potential yield volatility in the lead up to and aftermath of the Federal Reserve meeting later this week, at which it's expected to hike rates by 75 basis points.

• No companies were offering notes in the US currency. South Korea's Posco hired banks for a potential deal. Among non-dollar offerings, China's Ningbo Haishu started marketing 3Y euro senior unsecured notes at the 3.3 per cent area.
• In the secondary market, yield premiums on Asia ex-Japan dollar bonds were little changed to 0.25bp wider on Tuesday, according to credit traders. They narrowed over 2bps on Monday, their first tightening in 5 sessions, a Bloomberg index shows.
• The region's credit-default swap index rose 1.25bps, traders said, headed for its first advance in 5 sessions. The gauge dropped more than 14bps last week, the biggest such decline in 8 weeks, CMA data show. BLOOMBERG