“Like A Scooby-Doo Ghost Town”: Banks Yank Junk Loan Deals As Demand Craters
The equity market may be enjoying an deeply oversold bounce (at least until the next bank crisis crushes sentiment again), but the same can not be said for the primary debt market – especially for junk-rated paper – where deals are getting yanked left and right as demand hits a brick wall.
As Bloomberg notes, as the global bank crisis spreads, bank underwriters (those that are still standing that is) across the US and Europe are pulling sales and pausing future ones amid tepid demand. A quick look at the carnage shows that Barclays recently shelved a pair of loans for Ineos Enterprises and Russell Investments, while JPMorgan yanked a deal for Agiliti Health. Many other deals are about to be quietly pulled.
“The primary loan market feels like a Scooby Doo ghost town — recently deserted and a bit haunted,” said Scott Macklin, director of leveraged loans at AllianceBernstein.
It’s easy to understand why the primary market is entering a deep freeze: traditionally fickle and swinging along market sentiment, the sudden takeover of Credit Suisse and the failure of a trio of US regional lenders have chilled all interest in semi-distressed paper and sparked renewed fears among investors who were already forecasting a recession. The timing, Bloomberg notes, could hardly be worse for Wall Street’s lucrative leveraged lending desks, which are still seeking to offload billions of dollars of risky corporate debt stuck on their books to institutional investors following a flurry of mistimed financings last year.
In a painful twist for underwriting teams, bankers had found some “solace” in recent weeks with credit markets showing signs of recovery, with a bevy of leveraged buyouts announced in recent weeks, including Qualtrics, Univar Solutions and Cvent Holding. Yet hopes are quickly evaporating as volatility rips across markets, undermining efforts by banks to ramp up lending and grab back market share from private credit firms.
European leveraged loan prices slid after investors got spooked about possible contagion risks from the forced marriage of UBS and Credit Suisse brokered by the Swiss government. That contributed to Barclays withdrawing a €820 million ($883 million) loan for Ineos Enterprises that arranger banks had been shopping to investors. The loan, which was intended to be denominated in both dollars and euros, was one of the rare deals that was to fund an acquisition rather than a refinancing this year. And there’s uncertainty about upcoming deals.
Fears over the fallout from the SVB failure were also behind a duo of pulled loans: the $1.08 billion deal that medical equipment company Agiliti Health pulled and the proposed $1.16 billion amend-and-extend that Russell Investments withdrew.
“Issuance will remain light until concerns over financial sector deposit flows and liquidity ease,” said UBS credit strategist Matthew Mish. “This should happen by mid-April at the latest as banks start reporting first-quarter earnings.”
The latest loan market freeze comes at a time when leveraged loan issuance is already at its lowest volume since 2015 in the US and since 2016 in Europe, courtesy of the recent surge in interest rates which has hit investor appetite. Junk bond issuance has also been low, as it was last year. And with inflation stubbornly high and central banks committed to fighting surging prices, there’s likely to be more volatility ahead, Bloomberg notes. That adds to the challenge of underwriting new buyout debt, putting balance sheets at risk when investors are nervous about rising rates.
“I expect volatility this year,” said Lauren Basmadjian, co-head of liquid credit and head of US loans and structured credit at Carlyle Group. “The Fed has been moving rates at unprecedented speeds. They still have their inflation target. They finally broke something, right? There’s going to be other consequences.”
Meanwhile, even as trading prices on leveraged loans erased a good half of the gains they notched this year, they still remain elevated, largely thanks to the Fed’s rate hikes. An index that tracks the average price of European leveraged loans fell almost half a cent on the euro on Monday, its biggest one-day drop since September. Such moves raise borrowing costs and make new buyout financings a near non-starter at the moment.
“The concessions you might need to raise debt are probably fairly high now,” according to Young Choi, partner and global head of trading at King Street Capital Management.
Tue, 03/21/2023 – 13:20