Wall Street’s $38 billion loan backlog dampens new bank lending

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(Bloomberg) – Wall Street is struggling to cut the roughly $37.5 billion in risky business loans stuck on its books – and the pile of so-called suspended debt could be about to swell further as another big buyout funding stumble.

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A group of banks led by Bank of America Corp. and Citigroup Inc. have just days to try to sell $2.4 billion of debt that will help fund the takeover of auto parts maker Tenneco Inc. by Apollo Global Management Inc. before the deal closes on November 17.

Even after implementing some of the year’s biggest debt cuts, investors are still not biting and banks are now preparing to finance the operation themselves. Commitments on the loan portion were due Monday, and there was no official update for the junk bond, which was due to end last week.

If Tenneco’s loans and bonds are not rated, it will join the club of risky buyout debt that investors have avoided this year in the United States and Europe. The backlog of suspended debt threatens to extend a five-month drought in bank lending for new LBOs or acquisitions.

“Banks will simply stop taking on new commitments,” said Tim Clark, senior private equity analyst at PitchBook. “They already have to sort out the next nine or so that they committed to at the start of the year and once that is clear there is no guarantee that they will commit to any new packages because they have already have old debts on their books.”

Tenneco’s offer is part of a larger $5.4 billion debt package the banks agreed to provide Apollo in February, before credit markets soured. If the deal is funded by the banks, the tally of suspended debt would reach about $43 billion, according to data compiled by Bloomberg.

Read: Citi and BofA-led banks set to fund Tenneco’s $5.4 billion debt

The mixed reception for the sale of Tenneco’s debt reflects concerns about legal protections known as covenants, as well as the feasibility of the cost-cutting measures the company uses in its earnings projections.

But overall, investors are wary of debt below the credit rating scale. Risk appetite has weakened this year as the Federal Reserve’s aggressive fight against inflation could tip the US economy into recession.

For this reason, banks have had limited success in offloading other LBO financing – including for debt supporting the takeover of TV ratings firm Nielsen Holdings by Elliott Investment Management and Brookfield Asset Management Inc. This indicates that higher interest rates are already stifling business. debt markets.

The lenders already used $8 billion of their own money to fund the Nielsen transaction in October when the acquisition closed. They took advantage of the recent thaw in credit markets to offload about $2 billion from a junk bond sale. The banks are now buying a $1.75 billion loan for the deal from investors.

“Risk management will be tighter with losses and blocked trades,” said Noel Hebert, senior U.S. credit strategist at Bloomberg Intelligence. “The ground is probably more conservative and the rates are significantly higher, so there are just fewer deals to be done because the economy has changed.”

Of a total of 25 privatization deals announced since early June in the United States and Europe, none have been financed by banks, according to an analysis by PitchBook. In many cases, private lenders stepped in to provide funds. Yet JPMorgan Chase & Co., which reduced risk in leveraged finance last year, is now looking to expand its buyout business after avoiding numerous deals that resulted in losses for its peers.

Read: JPMorgan seeks to boost takeovers after rivals lose billions

In addition to the suspended debt, there are also the roughly $30 billion in bonds and loans that the banks have pledged to fund in the coming months, according to Deutsche Bank AG. That includes about $1.95 billion in debt for the takeover of Roper Technologies Inc.’s industrial business by subsidiaries of private equity firm Clayton Dubilier & Rice, which could close this quarter.

Even if the banks manage to get Tenneco across the finish line and continue to slowly reduce their mountain of locked-in debt, they will have to do so with some of the biggest discounts this year.

The bigger the discount, the more money the banks stand to lose on the sale, such as the loss of about $600 million on the takeover of Citrix Systems Inc. But for many lenders, slowly offloading big chunks debt – even with a discount – is a better option than letting debt languish on their books.

The loan portion of Tenneco financing, for example, is offered at a discounted price of 84 cents to 85 cents on the dollar – one of the biggest discounts of the year.

As a result, the world’s largest investment banks wrote down the value of LBO financings by nearly $2 billion in the second quarter. Citigroup and Morgan Stanley also disclosed takeover financing losses of about $100 million each in third-quarter earnings calls.

Investors looking at Twitter Inc.’s buyout debt, meanwhile, have offered to buy elements of the loan program at a discount as low as 60 cents on the dollar, which would be one of the biggest discounts. in a decade, Bloomberg reported. It was even as the social media company’s new owner, Elon Musk, raised the specter of bankruptcy.

Read: Here’s why Elon Musk’s speech on a Twitter bankruptcy is premature

“Normally we deal with sickening bloat when it comes to cost savings and potential growth of management teams,” said Christian Hoffmann, portfolio manager for Thornburg Investment Management. “More unusual, an owner tells you that his business could go bankrupt while the banks try to sell his debt.”

Elsewhere in the credit markets:

Americas

Seven firms are looking to sell investment-grade U.S. primary market debt on Tuesday, according to an informal survey of debt underwriters who declined to name the firms, following Monday’s nine-deal session.

  • Banks run by Bank of America Corp. launched a $1.75 billion leveraged loan sale to refinance debt that helped fund the takeover of TV ratings firm Nielsen Holdings Plc

  • Private equity firms are increasingly turning to a type of unconventional debt to shore up holding companies, as soaring interest rates and falling valuations make it more difficult to sell assets, fund distributions and fundraising for new investments

  • Voyager Digital Ltd. attempts to sign a deal to sell to one of the bidders who lost the auction for the bankrupt crypto lender, after the winner of that auction, FTX, was itself forced into insolvency proceedings

  • For deals updates, click here for the New Issue Monitor

  • To learn more, click here for Credit Daybook Americas

EMEA

There were 15 issuers across 19 tranches in Europe’s publicly syndicated debt market on Tuesday, raising the equivalent of 20.96 billion euros ($21.73 billion).

  • Struggling French care home operator Orpea SA is seeking to raise up to €2.1bn in new funds as part of a wider effort to get out of a client welfare scandal in a context of rising costs

  • Shareholders of Hurtigruten Group AS have agreed to provide a €20 million loan facility to support it as the company discusses alternatives for the maturities of its medium and short-term debt, according to a statement on Monday evening.

Asia

Stress in the South Korean credit market shows few signs of easing despite the government unveiling financial support totaling more than 50 trillion won ($38 billion) in recent weeks to help stabilize it.

  • Yields on three-month commercial paper, the type of stock that sparked the turmoil, extended their ascent on Tuesday. They hit a new 13-year high of 5.21%, according to data compiled by Bloomberg

  • China’s biggest builder is raising capital through the stock market after government moves to bolster the real estate sector sent industry shares soaring

  • Country Garden Holdings Co. is selling shares at an 18% discount to raise HK$3.9 billion ($499 million). Some of the proceeds will be used to pay off offshore debt, he said, helping to boost earnings from the company’s dollar bonds.

  • The total bond holdings of foreign institutional investors in China’s interbank market fell to 3.38 trillion yuan ($480 billion) at the end of October, according to data released by the Shanghai headquarters of the People’s Bank of China. Their holdings represent around 2.7% of the bonds on deposit in the market

–With help from Paula Seligson.

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