Market stabilization sees banks preparing to sell billions in junk debt

(Bloomberg Opinion) — Banks are preparing to shed billions of dollars in junk debt backing leveraged buyouts, counting on incipient stability in the market to finally shed underwriting for the likes of Wm Morrison Supermarkets Plc and the unit of Unilever Plc.

Lenders including Bank of America, Barclays and Goldman Sachs, among others, are looking to sell about $37 billion in subscriptions, much of which has been on their balance sheets since last year, with launches earmarked for after the holidays. of Holy Week.

The market cooled off towards the end of 2021, as the Omicron variant of Covid-19 delayed planned deal launches. Despite a more positive start to 2022, volatility emerged once again as inflation rose, fueling bets on interest rate hikes. Then the Russian invasion of Ukraine nearly shut down both the high-yield bond and leveraged loan markets from late February onward, making it impossible for banks to sell risk.

With secondary prices of leveraged loans rising again after their low point in mid-March, liquidity levels improving and the initial shock of the Russian invasion dissipating, the market is now seeing a degree of stabilization and Investors appear ready to put money to work again.

A Goldman Sachs representative declined to comment. Bank of America and Barclays did not immediately respond to a request for comment.

“The high-yield market has tightened significantly and is trading within where it was on February 24 when the war started,” said Zachary Swabe, portfolio manager at UBS Asset Management. “By definition, the market is more stable. Spreads are at levels where the primary process restarts, banks have incentives to issue, and the market is more comfortable with pricing primary credit risk likely in the near future.”

Bank of America and Goldman Sachs began premarketing in the US and Europe last week of a $1.85 billion leveraged loan supporting Temasek Holdings Pte’s acquisition of Element Materials Technology and are preparing for a trial. of general syndication, in what will be the first test in Europe. investor appetite for large-scale buyout financing. Although much of it is denominated in dollars, there is also a term loan B denominated in euros for $385 million.

supermarket sweep

Banks are preparing to release the remaining 4.4 billion pounds ($5.8 billion) of debt backing CD&R’s takeover of Morrison, the biggest leveraged buyout of a British company in more than a decade.

Financials for the fourth quarter, ending January 31, 2022, will be ready in the next two weeks, indicating a post-Easter release. The deadline to use third-quarter earnings, which covered the months through Oct. 31, ended in mid-March.

Due to its size, Morrisons will need to attract the attention of both sterling and euro loan and bond investors. A number of changes have already been made to account for deteriorating conditions since it was signed, including the £1.2bn junior bond sale in February to the Canada Pension Plan Investment Board and a reduction in the amount of senior secured bonds in sterling.

Separately, banks are preparing to launch a 2.1 billion euro ($2.3 billion) loan after Unilever agreed to sell some of the world’s best-known tea brands, from Lipton to PG Tips, to the firm. to purchase CVC Capital Partners, in one of the biggest deals of the past year. carve-outs by a European company.

Mergers and acquisitions agreements

Bank of America, Jefferies and Wells Fargo are seeking to commence the sale of €3bn of senior debt financing to follow CSC’s acquisition of Intertrust, while there is also €1bn of debt financing supporting the acquisition of Worldline by Apollo Global Management Inc. payment terminal unit.

A mammoth $16bn funding for Citrix Systems LBO will also be released after Easter, with at least around $1bn set to hit Europe.

Other major deals that lenders will need to focus on selling are a $5.5bn financing for 3G’s purchase of Hunter Douglas and a £2.1bn financing for the acquisition of the international operations of bookmaker William Hill by the online gaming company 888 Holdings Plc.

If investors put money to work in these deals, it will allow banks to finally clean up their balance sheets, making room for new subscriptions that are piling up, though they are likely to come with more protections and at a higher cost for private equity firms. .

“There’s no reason why the market wouldn’t finance a new leveraged buyout with senior and subordinated paper,” Swabe said. “They may have to pay for it.”

Elsewhere in the credit markets:

EMEA

Shares of Telecom Italia fell as much as 7.4% on Monday after people familiar with the matter said KKR & Co. plans to walk away from its €10.8 billion takeover proposal if the company does not give it the due diligence it needs. has been asking. since last November.

  • Testing company Element Materials Technology is on the market with $1.825 billion in term loans, of which the equivalent of $400 million will be denominated in euros. There’s a call from the lender on April 4th.
  • The Bloomberg Pan-European Total Return Index (excluding financials) rose 0.06% to 345.58 on Friday.

Asia

Chinese high-yield dollar bonds gained an additional 1-3 cents on the dollar on Monday, according to credit traders, after five days of gains in a Bloomberg index. Developer bonds lead gains, traders said.

  • Fitch Ratings has placed Chinese homebuilder KWG Group’s long-term issuer default rating at B+. and senior unsecured rating and outstanding bonds of B+/RR4, rated Watch Negative, according to a statement. The action reflects a delay in publishing the company’s audited financial statements.
  • Logan Group’s February 2023 dollar bond is set for its biggest increase since January 19, according to prices compiled by Bloomberg.

Americas

More than 100 companies around the world have delayed or canceled financing deals since the Russian invasion of Ukraine, including initial public offerings, bonds, loans and acquisitions.

  • Sales of US high-yield corporate bonds fell to just under $3 billion last week from just four issuers, an 11% decline from the previous week.
  • Meanwhile, US leveraged loans have outperformed other areas of credit. Scientific Games Corp. is holding a lender call Monday for a $2.2 billion loan to refinance debt
  • Financing for the purchase of CRH Plc’s Oldcastle Building Envelope unit by KPS Capital Partners could be announced this week, according to a person familiar with the matter. The exact time is uncertain

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