AlwaysFree: Wall Street’s $38 Billion Loan Backlog Curbs New Bank Lending

• Banks are preparing to fund $5.4 billion of debt for Tenneco
• Pile of hung loans on bank books could soon reach $43 billion

According to Bloomberg article published on November 16, 2022, Wall Street is struggling to whittle down the roughly $37.5 billion in risky corporate loans stuck on their books -- and the pile of so-called hung debt may be about to swell further as another large buyout financing stumbles.

A group of banks led by Bank of America Corp. and Citigroup Inc. have just days to try to sell $2.4 billion of debt that will help fund the buyout of auto-parts maker Tenneco Inc. by Apollo Global Management Inc. before the deal closes on Nov. 17. 

Even after slapping some of the year’s biggest discounts on the debt, investors still aren’t biting, and the banks are now preparing to fund the deal themselves. Commitments on the loan portion were due Monday, and there’s been no official update for the junk bond, which was scheduled to wrap up last week.

Should Tenneco’s loans and bonds fail to price, it will join the club of risky buyout debt that investors shunned this year across the US and Europe. The backlog of hung debt threatens to extend a five-month drought in bank lending for new LBOs or acquisitions.

“The banks will just stop making new commitments,” said Tim Clark, senior private equity analyst at Pitchbook. “They already have to clear the next nine or so that they committed to early in the year and once it’s clear, there’s no guarantee that they’ll commit to new packages, because they’ve already got old debt on their books.”

The Tenneco offering is part of a larger $5.4 billion debt package that the banks agreed to provide to Apollo in February, before credit markets soured. If the deal is funded by the banks, the tally of hung debt would swell to about $43 billion, according to data compiled by Bloomberg.

The lukewarm reception for Tenneco’s debt sale reflects concern about legal protections known as covenants, as well as the feasibility of cost-saving measures that the company is using in its earnings projections. 

But investors overall have been wary of debt lower down the credit rating scale. Risk appetite has waned this year amid concern the Federal Reserve’s aggressive fight against inflation could tip the US economy into recession.

Because of that, banks have had limited success offloading other LBO financings -- including for the debt backing the buyout of TV ratings business Nielsen Holdings by Elliott Investment Management and Brookfield Asset Management Inc. It’s an indication that higher interest rates are already choking companies off from debt markets.

Lenders already used $8 billion of their own money to fund the Nielsen transaction in October when the acquisition closed. They seized on the recent thawing in credit markets to offload about $2 billion of that from a junk-bond sale. Banks are now shopping around a $1.75 billion loan for the deal to investors.

“Risk management will be tighter with the losses and hung deals,” said Noel Hebert, a senior US credit strategist at Bloomberg Intelligence. “The pitch is likely more conservative and rates are definitely higher, so there are just fewer deals to get done because the economics have changed.”

In a total of 25 take-private deals announced since early June in the US and Europe, none were funded by banks, according to an analysis by Pitchbook. In many cases, private lenders have stepped in to provide funding. Still, JPMorgan Chase & Co., which cut back on leveraged finance risk last year, is now looking to grow its buyout business after avoiding many of the deals that sparked losses for its peers. 

In addition to the hung debt, there is also the roughly $30 billion of bonds and loans that banks have committed to finance in the coming months, according to Deutsche Bank AG. That includes roughly $1.95 billion of debt for the buyout of Roper Technologies Inc.’s industrial business by affiliates of private equity firm Clayton Dubilier & Rice, which may close this quarter. 

Even if banks do manage to get Tenneco over the finish line and continue to slowly chip away at their mountain of hung debt, they’ll have to do so by offering some of the steepest discounts this year.

The bigger the discount, the greater risk banks will lose money on the sale, such as the roughly $600 million loss for the buyout of Citrix Systems Inc. But for many lenders, slowly offloading chunks of debt -- even at a discount -- is a better option that letting the debt languish on their books. 

The loan portion of the Tenneco financing, for example, is offered at a discounted price of 84 cents to 85 cents on the dollar -- one of the steepest discounts of the year.

As a result, the world’s top investment banks marked down the value of LBO financing by almost $2 billion in the second-quarter. Citigroup and Morgan Stanley also disclosed losses of about $100 million each tied to buyout financing in third-quarter earnings calls.

Investors looking at Twitter Inc. buyout debt, meanwhile, offered to buy pieces of the loan package at a discount as low as 60 cents on the dollar, which would be among the steepest markdowns in a decade, Bloomberg reported. That was even as the social-media company’s new owner, Elon Musk, raised the specter of bankruptcy. 

“Normally we deal with cloying puffery as it relates to cost savings and potential growth from management teams,” said Christian Hoffmann, a portfolio manager for Thornburg Investment Management. “More unusual is an owner telling you his company could go bankrupt while the banks are trying to sell its debt.”

Elsewhere in credit markets:

Americas

Seven companies are looking to sell debt in the US investment-grade primary market on Tuesday, according to an informal survey of debt underwriters who declined to name the firms, following Monday’s nine-deal session. 

• Banks led by Bank of America Corp. kicked off a $1.75 billion leveraged loan sale to refinance debt that helped fund the buyout of TV ratings business Nielsen Holdings Plc
• Private equity firms are increasingly turning to an unconventional type of debt to shore up portfolio companies as surging interest rates and declining valuations make it harder to sell assets, fund distributions and raise money for new investments
• Voyager Digital Ltd. is trying to sign a deal to sell itself to one of the bidders that lost the auction for the bankrupt crypto lender, after the winner of that auction, FTX, was itself forced into insolvency proceedings

EMEA

There were 15 issuers across 19 tranches in Europe’s publicly syndicated debt market on Tuesday, raising the equivalent of €20.96 billion ($21.73 billion).

• Embattled French care-home operator Orpea SA is looking to raise as much as €2.1 billion in fresh funds as part of a broader effort to emerge from a scandal over guest welfare amid rising costs
• Hurtigruten Group AS’s shareholders have agreed to provide a €20 million loan facility to support it as the company discusses alternatives for its medium- and short-term debt maturities, according to a statement late Monday

Asia

Stress in South Korea’s credit market is showing few signs of easing despite the government unveiling financial support totaling more than 50 trillion won ($38 billion) in the past few weeks to help stabilize it.  

• Yields on three-month commercial paper, the type of security that triggered the trouble, extended their climb on Tuesday. They increased to a new 13-year high of 5.21%, Bloomberg-compiled data show
• China’s biggest builder is raising capital via the stock market after government measures to shore up the real estate sector sent the industry’s shares surging
• Country Garden Holdings Co. is selling stock at an 18% discount to raise HK$3.9 billion ($499 million). Some of the proceeds will be used to repay offshore debt, it said, helping spur gains in the company’s dollar bonds
• The total bond holdings of foreign institutional investors in China’s interbank market fell to 3.38 trillion yuan ($480 billion) by the end of October, according to data released by the People’s Bank of China’s Shanghai Head Office. Their holdings account for about 2.7% of bonds under custody in the market.

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