Wall Street banks, sitting on an estimated $50 billion of buyout loans they need to sell to investors, are testing the waters to see if they can start offloading the debt.
Credit Suisse Group AG is looking to sell a $3.35 billion loan to finance the buyout of auto dealership software company CDK Global Inc. It’s one of the biggest sales of the debt this year, and it comes after loan prices have edged higher in recent days.
The CDK sale is a test for how banks can manage the loans they previously committed to for funding buyouts by private equity firms. As inflation fears have turned into recession worries in 2022, loan prices have broadly dropped, making the debt harder to sell. The average loan was worth 94.8 cents on the dollar on Wednesday, up from 93.8 cents on May 25, but about 5 cents below the level at the end of last year.
The recent slight gains came after the Federal Reserve signaled that it might pause rate hikes later this year, giving investors more hope that a recession will be averted. That may give banks an opening to sell around $50 billion of loans and about $30 billion in bonds on their books for buyout financing, according to recent Deutsche Bank AG estimates.
Banks face tough choices now: they can cut the prices on the loans they’ve committed to make, and potentially take losses in the process. Or they can hang on to their committed loans and hope that near-term losses turn into gains in the future if the market improves. Or they can try to sell the debt to private lenders who often demand high yields but can get deals done quickly and quietly.
“What I’m really looking for is how many other deals launch on the heels of it,” said Lauren Basmadjian, co-head of liquid credit at Carlyle Group Inc., referring to the CDK sale.
The $50 billion of loans that banks have on their books is manageable by historical standards. During the 2007-2009 financial crisis, banks were at one point estimated to have held some $237 billion in loans when the music stopped, according to CreditSights. But post-crisis financial regulations have made it harder for banks to take outsized risk.
“There’s some pain in the system but it’s nowhere near the pain that banks experienced around the financial crisis,” said Bruce MacKenzie, head of high yield capital markets in the Americas at UBS Group AG on a recent call with media. “But it’s given credit committees and banks a bit more caution in terms of how they’re proceeding with underwriting.”
One reason that selling loans has grown harder in recent weeks is that the biggest buyers of the debt, fund managers who bundle loans into bonds known as collateralized loan obligations, have been less active. Year-to-date issuance of CLOs at the end of May stood about 10% lower than the same period in 2021, according to data compiled by Bloomberg.
In this environment, banks are scaling back their ambitions for loan sales, in case demand is tepid. Credit Suisse told investors it was selling $3.35 billion of CDK loans, after earlier discussing selling as much as $4.35 billion. The bank may try to raise the remaining $1 billion in the junk-bond market instead, although the final financing package is still uncertain, Bloomberg previously reported.
The proposed interest payments on the loan have risen during the sales process, initially equal to the Secured Overnight Financing Rate plus around 4.5 percentage points, and this week to SOFR plus somewhere between 4.75 percentage points and 5 percentage points. The loan is being offered at a discounted price in the range of 95 cents to 96 cents on the dollar.
Banks and buyout firms are also turning to private credit. The riskiest portion of CDK’s financing, $865 million that was originally underwritten as an unsecured bond, was sold by Goldman Sachs Group Inc. to its asset management division.
There’s a lot more that needs to get done outside of big buyout deals, said Carlyle’s Basmadjian, including add-on transactions and refinancing for next year’s maturities.
“If the market shows that it’s open, we’ll see more of those,” Basmadjian said.
Here’s a table of some of the biggest announced LBO financings in the pipeline that have yet to come to market:
|Borrower||Loans ($,b)||Bonds ($,b)||Other Financing||Underwriters||Expected Close||Transaction|
|Citrix Systems||7.05||4.0 (secured), 3.95 (unsecured)||1.0 (RCF)||BofA, CS, GS, BARC, CITI, DB, KKR, |
MIZ, MS, RBC
|Mid-2022||LBO via Elliot Investment Mgmt |
and Vista Equity Partners for $13b
|Nielsen||6.35||2.0 (secured)||2.15 (2L, privately placed), 0.65 (RCF)||BofA, BARC, CS, MIZ, HSBC, KKR, |
CITI, Nomura, Ares
|2H22||LBO via Elliott Investment |
Management and Brookfield
Asset Management for about $16b including debt
|TEGNA||3.5||1.496 (secured), 2.715 (unsecured)||0.5 (RCF)||RBC, BofA, GS, Truist, BNP, CS, JEFF, |
MIZ, TD, BARC, DB, MUFG, CITZ, SMBC
|2H22||LBO via Standard General for $8.6b including debt|
|TENNECO||2.4||2.0 (secured), 1 (unsecured)||CITI, BofA, BARC, BNP, JEFF, |
RBC, TD, WF, DB
|2H22||LBO via Apollo for $7.1b |
|6.5||3.0 (secured), 3.0 (unsecured)||0.5 (RCF)|
|MS, BofA, BARC, MUFG, |
BNP, MIZ, SG
|2022||LBO via Elon Musk’s for $44b|
Source: Data compiled by Bloomberg and people with knowledge of the deals.
Elsewhere in credit markets:
- Blackstone Inc. is marketing a $400 million collateralized loan obligation to take advantage of lower prices in the leveraged-loan market, according to people familiar with the matter.
- US mortgage rates dipped slightly for the third straight week of declines.
- Hospitals throughout America continued to lose money in the first part of the year as revenues dropped, while higher labor and supply-side expenses raised the cost of treating ever-sicker patients.
- For deal updates, click here for the New Issue Monitor
- For more, click here for the Credit Daybook Americas
- No new bond deals were marketed in Asia outside Japan for a second day running. Friday is a holiday in China and Hong Kong, which means the issuance drought is likely to persist.
- A major builder from China’s landlocked province of Henan is set to become the latest firm to get state support as authorities step up efforts to curb stress in the real estate sector. The nation’s 37th-largest builder, Central China Real Estate Ltd., said its parent, which is solely owned by Chairman Wu Po Sum, proposed to sell a 29% stake to a company wholly-owned by Henan’s provincial government.
- Private credit investors are jumping at the opportunity to exploit gaps in India’s banking sector, where lending tends to skew toward top-rated borrowers.