Global banks are growing wary of risky credits as turmoil envelops the industry, crushing the market for new leveraged finance deals just as it was beginning to regain its footing.
(Bloomberg) — Global banks are growing wary of risky credits as turmoil envelops the industry, crushing the market for new leveraged finance deals just as it was beginning to regain its footing.
Bank underwriters across the US and Europe are pulling sales and pausing future ones amid tepid demand. Barclays Plc recently shelved a pair of loans for Ineos Enterprises and Russell Investments, while JPMorgan Chase & Co. yanked a deal for Agiliti Health.
“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.
The sudden takeover of Credit Suisse Group AG and the failure of a trio of US regional lenders sparked renewed fears among investors who were already forecasting a recession. The timing 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.
Bankers had found some solace in recent weeks as credit markets started showing signs of recovery, with a bevy of leveraged buyouts announced, including Qualtrics International Inc., Univar Solutions Inc. and Cvent Holding Corp. 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 loans weakened after investors got spooked about possible contagion risks from the quick marriage of UBS Group AG 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.
“Issuance will remain light until concerns over financial sector deposit flows and liquidity ease,” said Matthew Mish, credit strategist at UBS. “This should happen by mid-April at the latest as banks start reporting first-quarter earnings.”
In the cases of 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, the loan market had softened because investors were worried about the fallout from the Silicon Valley Bank failure.
Borrowers Are Delaying Debt Deals in US at Fastest Pace In Year
Leveraged loan issuance is already at its lowest volume since 2015 in the US and since 2016 in Europe, according to data compiled by Bloomberg. New money deals were particularly sparse, the data show. Junk bond issuance has also been low, as it was last year.
With inflation stubbornly high and central banks committed to fighting surging prices, there’s likely to be more volatility ahead. 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.”
Paring Gains
Trading prices on leveraged loans erased a good half of the gains they notched this year. 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.
–With assistance from Jeannine Amodeo and Claire Ruckin.
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