(Bloomberg) — Lenders are now saddled with $2.2 billion in debt for an acquisition linked to a Canadian auto parts company, the first time Wall Street has been stuck with a big financing package since the Trump administration triggered a global trade war less than two weeks ago.
Typically, when a merger or acquisition is announced the companies involved immediately line up debt from banks, which then market it to investors in the leveraged loan and high-yield bond markets. On Tuesday, ABC Technologies Holdings Inc. closed its purchase of TI Fluid Systems Plc before the banks could sell the bonds and loans, according to people familiar with the matter.
In Wall Street parlance, that means the debt is now “hung.”
A group of banks including Citigroup Inc. and JPMorgan Chase & Co. will have to use their own balance sheets to fund the Apollo Global Management Inc.-backed ABC’s acquisition.
Representatives for Citigroup, JPMorgan, Apollo and TI Fluids all declined to comment.
Banks carrying a lot of hung debt on their balance sheets can become limited in their ability to underwrite other risky deals under capital reserve requirements. The last time the cogs of the leveraged-debt making machine got gummed up a few years ago Wall Street banks were stuck with around $40 billion of bonds and loans on their books, which diminished in value as investors shied away from deals.
While this year’s pipeline is far slimmer than in 2022 — the last time banks were glued to a precarious amount of junk-debt financing — a handful of deals were launched before US President Donald Trump announced sweeping tariffs on April 2. The ensuing wave of volatility effectively shut down new bond and loan sales for companies with less-than-stellar credit ratings.
Wall Street banks sought to raise about $1.3 billion equivalent in high-yield bonds alongside a $900 million leveraged loan for ABC.
It was the second acquisition this year to close without the debt being sold. In February, banks were stuck holding part of $750 million debt package for Lakeview Farms’ acquisition of Noosa Yoghurt.
After holding a lender call on March 25, banks launched the leveraged loan sale at a rate of 5.5 percentage points over the Secured Overnight Financing Rate, while investors were offered a discount between 95 to 96 cents on the dollar, Bloomberg News previously reported.
Investors balked at the offering because of concerns about how the tariffs would affect Toronto-based ABC and Oxford, England-based TI Fluid Systems. While that does not mean the banks will be stuck with the debt forever, Trump’s swiftly-changing tariff policies, and retaliatory measures from affected countries, means that it will take time to sort out.
The banks could sell the debt to private credit firms, amend terms of the debt deal to placate risk-averse investors or wait until volatility subsides, and bond and loan buyers are open to new transactions.
(Updates throughout, includes comment from TI Fluids.)
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