NEW YORK: Slowly but surely, investment bankers from New York to London are chipping away at the tens of billions of dollars in leveraged buyout debt that remains famously stuck on their balance sheets.
As loan prices in the United States and Europe stage a spirited rebound, global banks are managing to sell-down small chunks of risky financing packages that powered debt-fuelled 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$2bil (RM8.5bil) 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 merger and acquisition 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 (CLOs) – 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 United States, worth over US$3.2bil (RM13.6bil).
“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 CLOs 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 £25mil (US$31mil or RM132mil) 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 Capital Partners.
Banks also managed to raise a term loan “B” – typically a financing commitment that gets sold onto investors – worth €343.4mil (US$373mil or RM1.6bil) 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 €1.4bil (RM6.5bil) loan for Nord Anglia Education flexed tighter on healthy demand.
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$875mil (RM3.7bil) 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, there were 10 issuers with 12 tranches in Europe’s publicly syndicated debt market on Wednesday, selling a minimum of €5.6bil (RM26bil).
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$1bil (RM4.26bil) in the process.
In the Americas, majority of US high-grade bond sales priced through fair value overnight as robust investor demand saw five borrowers issue US$9.25bil (RM39bil), many at negative new issue concessions. — Bloomberg