By Saeed Azhar, Anirban Sen, Davide Barbuscia6 Min ReadNEW YORK (Reuters) – Top U.S. and European banks are dealing with more durable occasions within the riskiest elements of the mortgage market.FILE PHOTO: One U.S. greenback banknote is pictured by damaged glass on this illustration taken June 25, 2021. REUTERS/Dado Ruvic/Illustration/File PhotographThe largest U.S. lenders, together with Bank of America and Citigroup, wrote down $1 billion within the second quarter on leveraged and bridge loans as rising rates of interest made it more durable for banks to dump debt to traders and different lenders.The ache has additionally unfold throughout the Atlantic, after European lenders akin to Deutsche Bank and Credit Suisse reported losses for such publicity.Large U.S. and European banks are on observe to lose $5 billion to $10 billion extra in coming quarters on leveraged loans they’ve dedicated to underwrite, in keeping with bankers and analysts.Bank of America is amongst these most uncovered to such writedowns as a result of it’s financing at the least three massive buyout offers at a time when the LBO market has come to a standstill, bankers and analysts stated. Bank of America declined to remark.In the leveraged mortgage market, banks sometimes make higher-risk loans to traders who wish to buy firms utilizing the borrowed funds. As the market slowed, banks have responded with extra stringent phrases for brand new loans whereas struggling to distribute present loans to different lenders and institutional traders. Buyers are looking for extra favorable phrases.“If a bank wants to push a deal on to the market to investors, they’re going to have to bring it at a discount,” stated Dan DeYoung, excessive yield and leveraged mortgage portfolio supervisor at fund supervisor Columbia Threadneedle.Goldman Sachs, Bank of America and Barclays are among the many high three bookrunners for leverage buyout financing for each leveraged loans and bonds because the fourth quarter of 2021 within the United States and Europe, in keeping with information from Dealogic.Goldman Sachs and Barclays declined to remark.Banks sometimes promote the loans moderately than holding them. They wish to distribute about $80 billion to $100 billion of U.S. and European leveraged loans to different lenders and traders in September and October, a delay within the course of as a result of market disruption, in keeping with three bankers concerned out there. If they’re offered at a reduction, the underwriters must swallow some losses, the bankers stated.The market was disrupted by the Federal Reserve’s plan to tighten financial coverage to battle inflation, which sparked a pointy sell-off throughout fixed-income property this yr.The yield unfold on the ICE BofA U.S. High Yield Index, a generally used benchmark for the junk bond market, rose to a two-year excessive of round 600 foundation factors in July. It has narrowed to 425 foundation factors, however remains to be up 120 bps because the starting of the yr.“We all underestimated how big an issue inflation was, and how aggressively the Fed was going to have to move,” stated a senior mortgage banker in New York.“A number of the commitments that we wrote in the fourth quarter, and in January and early February, were quickly underwater because the rates were so aggressive,” he stated.The greater offers embody Bank of America-led financing for a $16.5 billion buyout of software program firm Citrix Systems Inc by associates of Elliott Management and Vista Equity Partners. The lender can be financing Apollo’s deal to purchase Tenneco Inc which had an enterprise valuation of about $7.1 billion, together with debt.Bank of America can be among the many banks backing billionaire Elon Musk’s $44 billion acquisition of Twitter Inc, a deal placed on maintain after Musk backed out. Twitter has sued to drive him to finish the transaction.For some, the market uncertainty deserves a wait-and-see method.“The debt committed in the system needs to get placed and the equity investors … are being cautious, which is limiting LBO activity,” stated Anu Aiyengar, international co-head of M&A at J.P. Morgan, referring to leveraged buyouts.The worth of present loans on the S&P Leveraged Loan Index fell to a two-year low in July, in keeping with Refinitiv information. While it has pared losses, the index’s decline this yr displays broader stress on the debt markets and rising considerations that the Fed’s financial tightening might stress riskier debtors. Two exchange-traded funds that observe leveraged loans, the SPDR Blackstone Senior Loan ETF and the Invesco Senior Loan ETF, have dropped 4.9% and three%, respectively, because the starting of the yr.“Both the availability and cost of debt financing for sponsors has become a challenge in some situations, particularly in the syndicated loan markets,” stated Steve Arcano, a world head of transactions practices for legislation agency Skadden, Arps, Slate, Meagher & Flom LLP, in regards to the problem confronted by buyout corporations.The credit score market is present process a wave of repricing after the Fed’s price hikes, in keeping with Minesh Patel, a senior director at S&P Global Ratings.“The real crux of the issue is that the markets have shifted,” Patel stated. Borrowing charges have gotten dearer for firms with decrease credit score scores, he stated, citing an S&P research he co-authored.Leveraged finance has been profitable for big banks in recent times, so the anticipated losses is not going to be too alarming, stated Marc Cooper, chief government of Solomon Partners, a boutique funding financial institution in New York.Large banks are “going to get crushed” within the newest bout of volatility, however “they’re big boys,” he stated. “They’ll take their writeoffs 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 ChangOur Standards: The Thomson Reuters Trust Principles.
