Wall Street banks rush to sell leveraged buyout debt as deals close

Buildings stand on Wall Street near the New York Stock Exchange. Banks sitting on about $80bn in leveraged buyout financing are pushing to get the debt off their books before market conditions deteriorate.

Banks sitting on about $80bn in leveraged buyout financing are pushing to get the debt off their books before market conditions deteriorate.Bank of America Corp. has begun gauging interest in debt for the $15bn buyout of Citrix Systems Inc, one of the largest LBO financings of the past decade. And BofA and Citigroup Inc are leading a syndicate testing investor appetite for a $5.4bn debt package to help fund Apollo Global Management Inc’s buyout of Tenneco Inc.Leveraged debt markets have been losers this year, and more pain is likely after Wednesday’s inflation report all but assured a big rate increase coming from the Federal Reserve, but bankers see a window to get deals done. Junk bond spreads tightened by about 50 basis points in the past week, according to Bloomberg index data. Leveraged loan prices have ticked up in recent days, though still hover near 92 cents on the dollar, the lowest since August 2020. “There’s a recognition that things aren’t going to get any better any time soon, so that’s why we’re seeing these LBO financings come now,” said Ken Monaghan, co-head of high yield at Amundi US. “The market is weaker today after the CPI print but the tone had improved a bit in the past week, so banks are also looking to take advantage of that. There’s demand for deals at the right level.”Bankers are also betting investors will consider the lack of choice. The primary loan market had a handful of launches this week, including Apollo’s merger of grocery retailers Tony’s Fresh Markets and Cardenas Markets. The deal offered a spread of 700 basis points over the Secured Overnight Financing Rate and a price of 92 cents on the dollar. Underwriters committed to the latest round of buyout financing – Deutsche Bank AG estimates about $80bn in loans and bonds – months ago, when markets were more stable. Since then, investors have fled junk bond and leveraged-loan markets as the Fed began raising rates and tightening liquidity to combat the worst inflation in four decades.Now, deadlines to complete acquisitions are looming, which may force banks to fund deals themselves unless they can find investors in the market. And depending on the price of the debt when sold – loans have been coming at steep discounts lately – the banks are at risk of losses running into the hundreds of millions of dollars. But that may be their best option.“If banks don’t successfully price the debt tranches to finance buyout deals they agreed to, they may be stuck holding them on their balance sheets,” said Nichole Hammond, a senior portfolio manager at Angel Oak Capital Advisors.A deal led by Deutsche Bank and UBS Group AG shows that LBO participants will get creative to get deals done.The banks launched a roughly $1bn leveraged loan and junk bond offering to help fund the buyout of Cornerstone Building Brands Inc by Clayton, Dubilier & Rice, after that private equity firm took on some of the debt. The planned financing consists of a $410mn leveraged loan, a $600mn secured high-yield bond and Clayton Dubilier’s contribution of $464mn of “payment-in-kind” debt, a risky security that typically allows a company to pay interest with more debt. With higher rates coming, deals must move fast or face greater challenges.“Until inflation breaks I think any open windows will be fleeting, especially for LBO risk,” said Bill Zox, a high-yield portfolio manager at Brandywine Global Investment Management.  The US consumer price index rose 9.1% from a year earlier, the largest gain in inflation since the end of 1981, causing US Treasury yields to rise and fixed-income securities prices to fall on anticipation the Federal Reserve will increase overnight rates by at least 75 basis points this month.Both borrowers that were weighing US high-grade bond sales Wednesday stood down as volatility flared following the red-hot inflation report.The Bank of Canada hiked interest rates by a full percentage point, a surprise move that supercharges efforts to withdraw stimulus before four-decade-high inflation becomes entrenched.A debt default by Graceland, the Elvis Presley mansion turned tourist attraction, shows why investors in other venues financed by municipal bonds may one day be singing the blues.Investors withdrew from fixed income mutual funds in the week ended July 6 for the 21st straight week of outflows, according to the Investment Company Institute.