(Bloomberg) — Banks in the business of lending to risky companies are still willing to arrange financing packages, even as some lenders run into tariff-induced turmoil that’s left them unable to offload debt to investors.
A handful of deals in euros and dollars show leveraged finance bankers are swallowing their fears of “hung debt” — if the price and borrower are right. They include underwriting KKR & Co.’s purchase of a Swedish healthcare firm, a $1.7 billion debt deal to aid its acquisition of post-trade services provider OSTTRA, and some $2 billion for Silver Lake Management’s stake in chips maker Altera.
Preferred borrowers typically have stronger credit ratings, backing from notable sponsors, or recognizable brands in defensive sectors. They also tend to be less exposed to tariff pressures.
The selloff “is pretty vast, but not indiscriminate,” said Michael Guarnieri, a managing partner at Evolution Credit Partners, in contrast with periods where primary markets completely shut down. “This time it’s different sectors, quality and exposures.”
One big test is a $4 billion sale of loans and bonds to finance QXO Inc.’s acquisition of Beacon Roofing Supply Inc., the biggest buyout financing to launch since US President Donald Trump’s reciprocal tariffs were announced on April 2, Bloomberg-compiled data show.
Banks on both sides of the Atlantic are taking stock of volatility that made risky loans and bonds all but unsellable this month. A few have swerved away from the typical route of a broadly syndicated sale in favor of offloading debt to deep-pocketed private credit funds. KKR, for instance, is weighing up a unitranche loan for at least one of the debt packages it’s raising, and other sponsors are considering similar moves.
Wall Street is desperate to avoid a rerun of 2022, when the market ground to a halt and banks were stuck with a backlog of some $80 billion they had to offload at steep losses, in many cases to private credit funds. This time, banks have continued to underwrite deals, albeit at a slower pace.
The uncertainty of on-again, off-again tariffs by the US against its biggest trading partners and the risk of a global recession has sidelined many transactions — and left a $4.6 billion tally of hung loans in its wake. A financing gets “hung” when banks that have underwritten loans for a buyout can’t sell the debt to investors before the acquisition has closed.
That recent history is reason enough for some of the biggest US banks to stay out of new deals. Morgan Stanley declined the chance to join KKR’s group of underwriters in its Swedish deal, while banks on a recent $5.75 billion, 364-day bridge loan to back Clearlake Capital Group’s purchase of Dun & Bradstreet Holdings Inc. offered none of the guarantees that usually accompany an underwritten leveraged buyout.
The European market has been somewhat more forgiving. In the middle of one of the most volatile weeks in recent times, bankers managed to sell down the debt backing Bain Capital’s purchase of German real estate outfit Apleona Group GmbH. They had to sweeten pricing, but they still earned their full fees, according to people familiar with the matter.
Prices in the secondary market for European and US leveraged loans fell sharply in the wake of the tariff announcement, according to Morningstar Indexes. While they’ve both recovered some ground since then, the US index dipped again on Monday following Trump’s broadsides against Federal Reserve Chair Jerome Powell.
The declines have tempted some investors to liquidate existing holdings to keep cash on hand for better deals in the secondary market, and to wait to see if the market has found its bottom.
“We can be willing to miss some of these offerings,” said Scott Pike, a senior portfolio manager at Income Research Management. “We do not feel forced. It offers us the ability to look at offerings and bid back a little bit.”
The faster recovery in Europe mirrors developments in currency and government bonds, where the euro is trading around a more-than-three year high and German benchmark bonds are on course for their biggest monthly gain against Treasuries since 2003.
After a shortage of dealmaking, Wall Street lenders were preparing at least $38 billion worth of bonds and loans for buyouts in dollars and euros at the end of March. That was before Trump’s Liberation Day announcement on April 2.
While the US president has paused the harshest tariffs on most countries, though crucially not China, leveraged loan bankers are still feeling queasy.
Further tests of appetite will come from the launch of €2.5 billion of high-yield bonds backing Flutter Entertainment Plc’s acquisition of Playtech Plc’s Italian gambling business and $4.25 billion in bonds and loans backing Sycamore Partners’ buyout of Boots, part of the bigger Walgreens Boots Alliance Inc. take-private.
–With assistance from Alice Gledhill and James Hirai.
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