Debt losses for buyouts top US$1b and banks brace for more

CHASING 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.

Six banks including JPMorgan Chase & Co, Goldman Sachs Group and Citigroup recorded the paper losses on loans, mostly made to fund leveraged buyouts. Bank of America led the pack with a US$320 million write-down, while Morgan Stanley reported US$282 million in losses on corporate loans held for sale, according to earnings posted over the last week.

The pain stems from loans that banks agreed to make months ago to fund LBOs before credit markets were hit by fears of a recession. Lenders have about US$38.1 billion of committed loan financing left to sell to investors, plus around US$31.3 billion of junk bond funding, according to a Deutsche Bank investment bank estimate from Monday (Jul 18).

The US$1.3 billion includes commitments to fund leveraged buyouts that are still pending, as well as other corporate loans. On top of those, banks have also taken hits on buyout debt they sold at a loss.

Many banks are looking to offload their loans fast, as acquisitions close and before prices drop further. With fears of an economic downturn broadly hitting markets, loan prices average around 92.45 US cents on the dollar after starting 2022 closer to 99 US cents. Strategists at Bank of America see more pain ahead, forecasting a fall to somewhere around 87 US cents to 90 US cents as corporate revenues suffer from slowing economic growth.

A group of banks led by Deutsche Bank and UBS Group have cut prices on about US$1 billion of loans and bonds to help fund the buyout of Cornerstone Building Brands as recession fears weaken demand for risky debt. The loans are now being sold at around 90 US cents on the dollar to 91 US cents, from 93 US cents when the deal was launched last week. Junk bonds for the deal are being offered at around 90.3 US cents, to yield about 11 per cent.

JPMorgan consciously reduced its share of bridge financing over the last 12 months, said Jamie Dimon, chief executive officer, soon after the bank posted earnings on Jul 14.

"A lot of people will lose a lot of money there, and we lost a little," he said. The total amount of loans held for sale by banks on Wall Street is around US$100 billion, about a fifth of the US$480 billion held by banks prior to the financial crisis in 2007, he said.

Generally for banks, these loan losses are cutting into earnings rather than triggering net losses. But the firms' exposure has to be carefully managed with so many risks on the horizon, said Mike Mayo, banking analyst at Wells Fargo & Co.

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"No bank can afford to drop their guard in an environment such as this," he said in an interview.

Among the large buyout deals that have yet to come to the market are the US$15 billion of debt for Citrix Systems and the US$5.4 billion financing package for Tenneco. Lenders have a small window of time before a summer slowdown in the market in August.

Investors have broadly been willing to buy the debt at steep enough discounts. Pacific Investment Management, for example, bought about 1 billion euros (S$1.4 billion) of debt backing Apollo Global Management's acquisition of a payments company at a steep discount in the range of 85 US cents on the euro, Bloomberg reported on Tuesday.

Any tallies of second-quarter loan losses are still missing writedowns at banks based in Europe, where markets have fared even worse. Credit Suisse Group, Barclays and Deutsche Bank all report quarterly results next week.

"There's still potential that some other capital market player had a mishap," said Wells Fargo's Mayo.

Elsewhere in credit markets:

Americas

Private prison operator Geo Group is seeking to extend its debt maturities and get breathing room at a time when investors and banks have grown wary of lending to the industry.

• Bank of America is the latest of the big 6 American banks to tap the US high-grade primary market following Monday's deals from JPMorgan, Morgan Stanley and Wells Fargo. Bank of New York Mellon and US Bancorp are among the other issuers selling fresh bonds Tuesday.

EMEA

Three issuers sold the equivalent of 1.54 billion euros of deals, according to data compiled by Bloomberg.

Asia

TSMC, the world's biggest chipmaker, was the sole company to market dollar debt in Asia on Tuesday, with higher borrowing costs and a strong US currency keeping borrowers sidelined.

• Chinese high-yield dollar bonds fell about 1 US cent on the dollar Tuesday, according to credit traders, with developers including China South City and Central China among the biggest decliners BLOOMBERG