NEW YORK/LONDON (Jan 25): Slowly but surely, investment bankers from New York to London are chipping away at the tens of billions of dollars in leveraged buyout (LBO) debt that remains famously stuck on their balance sheets.
As loan prices in the US and Europe stage a spirited rebound, global banks are managing to sell down small chunks of risky financing packages that powered debt-fueled acquisitions in the low-rate era. That’s no mean feat given the diminished investor appetite for the obligations just a month ago.
Underwriters for the buyout of Citrix Systems Inc have offloaded another sliver of a massive debt package that they were left saddled with during last year’s market slump. Other Wall Street institutions are eyeing loan sales for the buyout of Roper Technologies Inc, while a roughly US$2 billion loan for NielsenIQ is expected to start pre-marketing soon.
There’s a long way to go before Wall Street manages to flog off the bulk of the risky loans and bonds left on their books to institutional investors — a burden that has clogged up the fee-rich M&A machine and changed the power dynamics in the risky lending market.
But some investors are betting the loan rally has room to run if global growth holds up, a boon for bankers and private-equity executives grappling with the slowdown in deals.
“As long as the economy doesn’t disappoint the markets’ currently constructive expectations for a soft landing, returns have a fighting chance at holding up,” said Jeremy Burton, a portfolio manager at PineBridge Investments.
Risky credit has rallied in tandem with a global rebound across assets, a move attributed to growing bets that the Federal Reserve will secure a soft economic landing, just as credit managers adopt fresh positions for the year ahead. A flurry in new collateralised loan obligations (CLO) — traditionally one of the biggest drivers of demand for leveraged debt — is also helping market sentiment. January saw a big spike in fresh CLOs in the US, worth over US$3.2 billion.
“There’s definitely a lot of appetite for new loans in the market,” said Roberta Goss, senior managing director and head of the bank loan and collateralised loan obligations platform at Pretium Partners LLC. “There’s been plenty of demand for the handful of loans that have been sold in January, which speaks to the health of the market and is partly driven by new CLO creation.”
It’s a similar story in Europe, where underwriters are whittling away at their so-called hung debt burdens. The expiry of sales restrictions has enabled Goldman Sachs Group Inc to offload its remaining £25 million (US$31 million) or so of sterling loans in Wm Morrison Supermarkets Plc. Goldman, along with the likes of Bank of America Corp and Barclays Plc, sold sterling loans in Ekaterra BV, a tea business Unilever Plc sold to CVC.
Banks also managed to raise a term loan B — typically a financing commitment that gets sold onto investors — worth €343.4 million (US$373.3 million) for IT firm Inetum SA. That will help reduce the term loan A that they were stuck holding last year, as markets soured. Pricing is also on the way up. The €1.4 billion loan for Nord Anglia Education flexed tighter on healthy demand.
Leverage Uptick
Private equity sponsors are also managing to add leverage to deals that were structured very conservatively only a few months ago. Stonepeak Partners, for example, is looking to raise US$875 million of debt to help finance its acquisition of Intrado Corp’s safety business, which was originally backstopped entirely by equity.
Still with loan downgrades seen accelerating, there’s a limit to the rebound. The floating-rate nature of the debt also means borrowers’ interest costs rose last year alongside central bank rate hikes, spurring the likes of Vanguard to steer away from weaker parts of the asset class.
“The rally we’ve seen in the loan market is mainly driven by technicals, such as loan repayments and CLOs ramping up. But we expect loan prices to soften through mid year,” said Dave Preston, head of structured credit research at AGL Credit Management LP. “We are still seeing downgrades and given the recession outlook, we remain cautious.”
Elsewhere in credit markets:
EMEA
There are 10 issuers with 12 tranches in Europe’s publicly syndicated debt market on Wednesday, selling a minimum of €5.6 billion.
- Global high-grade companies have sold more than US$400 billion of bonds in January alone, but the sheer speed and ferocity of the advance has left some fund managers asking if it is all happening too soon.
- UK pension programmes trying to offload their business to insurance firms are rushing to bolster their balance sheets, according to analysts at HSBC Holdings Plc.
- Supply of hybrid bonds — subordinated notes that combine elements of debt and equity — is already running at more than twice last year’s pace with US$5.3 billion priced so far this month.
- Embattled French care-home operator Orpea SA defeated an effort in court by some of its lenders and minority shareholders to suspend the company’s debt restructuring.
Asia
Asian primary markets were quiet with investors away in many parts of the continent for Lunar New Year, though India completed its debut green bond issuance, raising US$1 billion in the process.
- India’s maiden sovereign green bond issuance fetched a better-than-expected yield, as the government takes baby steps to raise funds for its transition to cleaner energy.
- Ineos is lining up a US$650 million loan to bank its acquisition of a 50% stake in Shanghai SECCO Petrochemical. The deal was underwritten by at least two banks and will have dollar and yuan tranches. Ineos and Sinopec announced in December that they have completed the acquisition, and also established a 50:50 joint venture for Acrylonitrile Butadiene Styrene.
Americas
The majority of US high-grade bond sales priced through fair value overnight, as robust investor demand saw five borrowers issue US$9.25 billion, many at negative new issue concessions.
- New York Life priced a rare longer-tenor funding agreement backed note (FABN), bringing a US$1 billion 10 year at +110, at least 5bps through their curve.
- Tensions between Brazilian banks and the billionaires behind Americanas SA are escalating, with creditors trying to halt the bankruptcy protection process after the main shareholders sought to shift blame for the retailer’s blowup.
- Wahoo Fitness LLC has hired bankers at Solomon Partners Securities to explore financing options, as the fitness technology company burns through cash and consumers pull back, according to people with knowledge of the situation.
- Petroleos Mexicanos plans to issue bonds in the coming weeks, as the indebted Mexican state oil company looks to pay off maturities coming due in the first quarter, according to three people familiar with the situation.