Banks across Europe and the US committed to lend tens of billions of dollars for leveraged buyouts and acquisitions. Now they need to find buyers for the debt, and demand is relatively weak.
A group of lenders including Credit Suisse Group AG, Bank of America Corp, and Goldman Sachs Group Inc is committed to provide around $15bn of financing for the leveraged buyout of Citrix Systems Inc, a maker of remote-work software, and is expected to try to offload that exposure as soon as next month. That’s just one of the more than $37bn of pending debt deals in Europe, and $38bn of coming leveraged loans in the US, figures that both include at least some Citrix debt, according to data from Bloomberg and Deutsche Bank AG respectively.      
Selling debt isn’t impossible now, but bond and loan markets are less active than they’ve been in years, and a growing number of offerings are being delayed or withdrawn altogether. Russia’s invasion of Ukraine has boosted fears of inflation while raising more questions about how quickly central banks will tighten rates.
Europe’s debt markets have been hit particularly hard, with sales of junk bonds frozen for the last 20 days, but the US hasn’t been immune to difficulty either. Companies that for years have been able to borrow for virtually anything are finding that the era of easy money is coming to an end, with rate hikes expected in the US this year, and potentially Europe as well.
Demand for loans should rise again at some point, because money managers are looking to bundle that debt into bonds called collateralised loan obligations, said Christoph Zens who heads Tikehau’s collateralised loan business in the UK. There are probably around 70 to 80 of these deals being put together now in Europe, he said. “There are quite a few banks sitting on paper waiting to be syndicated but no one wants to go first and find what the demand level is,” Zens said. It might take two weeks, six weeks, or more depending on the broader macroeconomic situation, he said.
The $37bn of pending debt deals in Europe include both loan and bond sales. Banks led by Barclays Plc have already lost money and been stuck with more than $300mn in loans from the Covis Pharmaceuticals Inc deal in February that struggled for weeks to attract investors. Lenders don’t want a repeat.
New M&A: Despite Russia’s invasion of Ukraine, acquisitions and buyouts are still happening. A consortium led by Macquarie Group Ltd and KKR & Co is in advanced talks to buy the UK electricity distribution business controlled by Hong Kong tycoon Victor Li, a deal that could value UK Power Networks at as much as £15bn ($20bn).
In the US there hasn’t been a dramatic decline in discussions on new buyouts or acquisitions, though there may be fewer auction processes making it all the way to the finish line, said Trip Morris, head of leveraged finance at Wells Fargo & Co.
“Our activity level on looking forward to potential transactions has really not abated over the last few weeks,” he said. “It’s obviously become a little bit more difficult to figure out how to structure and price a transaction.”
Elsewhere in credit markets:
EMEA: No issuers tapped the market on Friday, with the weekly tally standing at nearly €16bn ($17.6bn), the lowest of the year so far. The drought in leveraged debt also continues with no junk-rated company in the market.
No CLO has priced since Russia’s invasion of Ukraine last week.
Credit risk measures for both investment-grade and junk bonds are extending for a second consecutive session on Friday in light of the latest attack on Europe’s largest nuclear power plant in Ukraine.
Asia: Credit investors are rushing to protect their portfolios to an extent not seen in years as Russia’s invasion of Ukraine adds to surging inflation risks.
The cost to insure investment-grade debt in Asia is set to widen for a ninth week, a record stretch. Credit-default swap prices rose another one to two basis points on Friday after Ukraine said Russia attacked a nuclear power plant. Asian junk dollar bonds were poised to hit a record low after the news.
Chinese high-yield dollar bonds dropped 2-5 cents on the dollar on Friday, according to credit traders, as developers continued to slide alongside stock weakness.
Shimao Group Holdings Ltd has obtained a three-month grace period for payments due on about 6bn yuan ($950mn) of high-yield trust products, according to people familiar with the matter.
Americas: Three days of relative calm in financial markets allowed the floodgates to open in the US high-grade primary market with companies selling over $50bn in fresh bonds.
Over this period, new issue concessions averaged 10 basis points while issuers saw their trades well subscribed with average book orders of 3.5 times deal size.
Syndicate desks have been waiting to pounce on an opportunity to sell debt, and so far March is off to a stellar start as financial markets have calmed somewhat from late February.