Banks sit on billions of LBO financings as demand for debt falls

Banks across Europe and the U.S. 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, Bank of America and Goldman Sachs Group is committed to provide around $15 billion of financing for the leveraged buyout of Citrix Systems, 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 $37 billion of pending debt deals in Europe, and $38 billion of coming leveraged loans in the U.S., figures that both include at least some Citrix debt, according to data from Bloomberg and Deutsche Bank respectively.

Bloomberg/Photographer: Bloomberg/Bloomber

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and loan markets are less active than they’ve been in years, and a growing number of offerings are being delayed or withdrawn altogether. Concerns that war risks are intensifying roiled markets around the globe, pushing the spread on the benchmark U.S. high-grade CDS index, which widens as risk rises, 3.3 basis points higher to 74.6 as of 10:35 a.m. New York time on Friday.

“The opportunistic refinancing trade is on the back burner until things recoup,” said Richard R.S. Smith, head of leveraged capital markets at Mizuho Americas. “The private equity trades, the underwritten trades, will time it accordingly.”

Europe’s debt markets have been hit particularly hard, with sales of junk bonds frozen for the last three weeks, but the U.S. 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 U.S. 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 collateralized loan obligations, said Christoph Zens who heads Tikehau’s CLO business in the U.K. 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.

Europe risks

The $37 billion of pending debt deals in Europe include both loan and bond sales. Banks led by Barclays have already lost money and been stuck with more than $300 million in loans from the Covis Pharmaceuticals 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 and KKR is in advanced talks to buy the U.K. electricity distribution business controlled by the Hong Kong tycoon Victor Li, a deal that could value UK Power Networks at as much as 15 billion pounds ($20 billion).

In the U.S. 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.

“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.”