ANALYSIS – US and European banks could lose more than $5 billion from risky buyout loans

By Saeed Azhar, Anirban Sen and Davide Barbuscia

NEW YORK, August 17 (Reuters)American and European top banks are facing tougher times in the riskiest parts of the lending market.

The largest US lenders, including Bank of America BAC.N and Citigroup NCwrote down $1 billion in the second quarter on leveraged and bridge loans as rising interest rates made it harder for banks to offload debt from investors and other lenders.

The pain has also spread across the Atlantic, after European lenders such as Deutsche Bank DBKGn.DE and Credit Suisse CSGN.S losses reported for such exposure.

Major US and European banks are on course to lose $5 billion to $10 billion more over the next few quarters on the leveraged loans they have committed to subscribeaccording to bankers and analysts.

Bank of America is among thdare the most exposed to such writedowns because it is funding at least three major buyouts at a time when the LBO market has stalled, bankers and analysts said. Bank of America declined to comment.

In the leveraged loan market, banks typically provide high-risk loans to investors who want to buy businesses using borrowed funds. As the market slowed, banks reacted with stricter conditions for new loans while strugglinging to distribute existing loans to other lenders and institutional investors. BBuyers are looking for more favorable terms.

“If a bank wants to offer a market deal to investors, they’ll have to offer it at a discount,” said Dan DeYoung, portfolio manager of high-yield and leveraged loans at fund manager Columbia Threadneedle.

Goldman Sachs, Bank of America and Barclays have been among the top three bookrunners for leveraged buyout financing for leveraged loans and bonds since Q4 2021 in United States and Europe, according to Dealogic data.

Goldman Sachs and Barclays declined to comment.

Banks generally sell loans rather than hold them. They want to distribute about 80 to 100 billion dollars of United States and Europe leveraged loans to other lenders and investors in September and October, a delay in the process due to market disruption, according to three bankers involved in the market. If sold at a discount, underwriters would have to swallow losses, bankers said.

The market was disrupted by the The Federal Reserve’s tightening plan Monetary Policy to fight inflation, which has triggered a strong sell-off in fixed-income assets this year.

The yield spread on the ICE BofA US High Yield Index .MERH0A0, a commonly used benchmark for the junk bond market, hit a two-year high of around 600 basis points in July. It shrunk to 425 basis points, but is still up 120 basis points since the start of the year.

“We all underestimated the size of the inflation problem and how aggressively the Fed was going to have to act,” said a senior banker in New York.

“A number of commitments we made in the fourth quarter, as well as January and early February, were quickly underwater because rates were so aggressive,” he said.

The most significant transactions include the financing led by Bank of America for a Acquisition for 16.5 billion dollars of the software publisher Citrix Systems Inc CTXS.O by subsidiaries of Elliott Management and Vista Equity Partners. Lender also funds Apollo’s deal to buy Tenneco Inc.TENNESSEE which had a business valuation of on $7.1 billion including debt.

Bank of America is also among the banks backing billionaire Elon Musk’s $44 billion acquisition of Twitter Inc. TWTR.Na deal put pending after Musk’s withdrawal. Twitter has followed to force him to close the deal.

For some people, the market uncertainty deserves a wait-and-see approach.

“Debt committed to the system needs to be placed and equity investors … are exercising caution, which limits LBO activity,” said Anu Aiyengar, global co-head of mergers and acquisitions at JP Morgan, referring to the leveraged buyouts.

The price of existing loans on the S&P Leveraged Loan Index .SPLEVLNIDX fell to a two-year low in July, according to data from Refinitiv. While he has reduced lossesthe index’s decline this year reflects broader pressure in debt markets and growing concerns that Fed monetary tightening could put pressure on riskier borrowers.

Two exchange-traded funds that track leveraged loans, the SPDR Blackstone Senior Loan ETF SRLN.K and the Invesco Senior Loans ETF BKLN.Kfell 4.9% and 3% respectively since the start of the year.

“The availability and cost of debt financing for sponsors has become a challenge in some situations, particularly in syndicated loan markets,” said Steve Arcano, global head of dealings practice for law firm Skadden, Arps, Slate, Meagher & Flom LLP. , on the challenge facing buyout companies.

The credit market undergoes a wave of repricing after the Fed’srate hikesaccording to Minesh Patel, senior director at S&P Global Ratings.

“The real crux of the matter is that markets have changed,” Patel said. Borrowing rates become more expensive for companies with lower credit ratings, he said, citing an S&P study he co-authored.

Leveraged financing has been lucrative for big banks in recent years, so expected losses won’t be too alarming, said Marc Cooper, managing director of Solomon Partners, a boutique investment bank in New York.

Big banks will ‘get crushed’ in latest bout of volatility, bbut “they are big boys”, he said. “They’ll take their radiation and move on.”

(Reporting by Saeed Azhar, Anirban Sen and Davide Barbuscia in New York; Additional reporting by Chibuike Oguh and Lananh Nguyen; Editing by Richard Chang)

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