Wall Street Prepares for $15 Billion Spree of Risky Buyout Debt

A $15.4 billion wave of debt is set to sweep over leveraged finance markets in September as Wall Street banks rush to lure in yield-hungry investors.

(Bloomberg) — A $15.4 billion wave of debt is set to sweep over leveraged finance markets in September as Wall Street banks rush to lure in yield-hungry investors.

Bankers are expected to kick off a series of new junk bonds and loans tied to M&A after the Labor Day holiday in the US. While the forward calendar pales in comparison to 2019 — which had a roughly $60 billion pipeline in August, according to PitchBook LCD — it’s a welcome development in a market that’s seen little seen little buyout financing so far this year.

“The volume of conversations that we’re part of — and we’re probably not unique in that regard — is much higher than it’s been at any time this year,” said Daniel Toscano, global head of leveraged finance at Morgan Stanley.

Deals expected to launch in September include about $8.4 billion of syndicated debt for GTCR’s purchase of a majority stake in Worldpay Inc. 

About $3.7 billion of debt for the buyout of Syneos Health, a roughly $1 billion loan for the buyout of publisher Simon & Schuster Inc. and near $1.7 billion in debt for the acquisition of packaging firm Veritiv Corp. are also in the pipeline. 

Banks have been committing to financing for a slew of new deals, repopulating thin debt pipelines even as Federal Reserve officials vow to fight inflation by keeping borrowing costs elevated.

A resilient US economy has helped to support dealmaking despite high interest rates and increased regulatory scrutiny. Plus, banks have cleared out much of the old buyout debt stuck on their books and are now competing to win back business from private creditors. 

Investors flush with cash, meanwhile, are eager to buy syndicated loans and junk bonds, which gives banks more confidence in bidding for deals. 

“There’s a real hunger from high yield investors for any kind of new issue,” said John Fekete, managing director and head of capital markets at Crescent Capital Group.  

Corporate borrowers have taken advantage of such demand by selling longer-dated bonds and loans to replace imminently maturing debt. They’ve also been swapping second-lien debt for first-lien debt, issuing to pay dividends and repricing loans.

That stands to continue in the coming months, even beyond an uptick in September issuance, according to Michael Schechter, partner and head of credit trading in Ares Management’s credit group.

“I see September as being relatively busy, with a pickup on net new money,” he said. “After that, there will likely be a return to more refinancing-type business with the ability to do some opportunistic trades.”

Up in Quality

Still, money managers are poised to keep a close eye on the quality of portfolios as rates remain higher for longer. Many of the biggest buyers of leveraged loans — those who bundle them into collateralized loan obligations — are under pressure to cut back on their purchases as they run out of time to reinvest their money.

About 40% of the CLO market will see limits on reinvesting by the end of the year, fueling demand for shorter, high-quality loans, according to Barclays. Investors in the space are also likely to cut back on risky CCC debt in their portfolios as the Fed keeps borrowing costs high.

“That makes everything else well bid,” said Edwin Wilches, co-head of securitized products at PGIM Fixed Income, “because that’s the only stuff that people want to buy.”

–With assistance from Jeannine Amodeo.

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