Wall Street banks re-enter the junk debt market

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Wall Street is slowly reactivating its junk debt machine.

Banks have agreed to lend billions of dollars to finance leveraged buyouts by Apollo Global, Elliott Management, Blackstone and Veritas Capital in recent months, as Wall Street re-enters a market that has left it suffering painful losses in the last year.

This is welcome news for the private equity behemoths that are sitting on hundreds of billions of dollars of dry powder and looking for attractive financing options, as higher interest rates eat into their yields.

Bankers say that despite the turmoil that hit the banking sector this spring, underwriting is once again becoming a more attractive option.

“Silicon Valley Bank and Credit Suisse struck just as we were collecting an offer, slowing us down,” said Chris Blum, head of corporate finance at BNP Paribas. “[But] you’re starting to see the syndicated option come back.

Investment banksRevenues were hit hard by a sharp decline in corporate and private equity deals, with the economic outlook increasingly bleak and the banking crisis in the spring helping to push M&A volumes to their fullest. lowest level in a decade in the first quarter.

Underwriting fees for junk bonds and leveraged loans – the debt used to string leveraged buyouts – are down more than 20% from their five-year average, according to data from the London Stock Exchange Group.

Banks are now hoping to take advantage of a rally in junk bond and leveraged loan markets this year, which have been starved of new issuance. Private equity firms had largely turned to direct lenders such as Apollo, Blackstone Credit and HPS Investment Management to finance their acquisitions, while public markets fell in value and banks became reluctant to lend.

“As lenders, we’ve told banks, ‘We’re open for business, you can enter our market,'” said Lauren Basmadjian, co-head of liquid credit at Carlyle, which invests in syndicated loans, though she added that some banks were “still reluctant to underwrite”.

“We could see the pendulum swing back and forth throughout the year when our market looks good for access,” he said.

This month, a group of banks led by Goldman Sachs agreed to lend Elliott and some of the firm’s partners $3.7 billion in support of its acquisition of healthcare company Syneos. The bank financing package beat out a rival proposition from private lenders, according to people familiar with the matter.

This comes on the heels of Blackstone’s decision to swap a debt package that included $2.6 billion in private loans – loans from non-bank lenders that don’t trade in public markets – that he had lined up for an investment in the climate technology Emerson unit to public markets. It was a setback for private lenders, including Sixth Street, Goldman Sachs Asset Management and Apollo, as they needed to have the money ready to lend if Blackstone completed the deal as originally planned.

Private lenders were paid a break fee after losing the deal, which was ultimately financed with $5.5 billion in debt, including a $2.7 billion term loan at very high rates. more favourable, sources noted.

Apollo’s acquisition of Arconic, announced this month, will also be financed by banks including JPMorgan before the loan is sold to other investors.

Marc Lipschultz, co-CEO of asset manager Blue Owl, said banks took a “shotgun” approach when agreeing to finance private equity buyouts, meaning they were very selective.

Banks have mostly intervened in deals when the amount of debt and credit risk were relatively low, at least by private equity industry standards. That was the case with two recent deals that banks financed: Silver Lake’s Acquisition of Qualtrics for $12.5 billion and Blackstone’s $4.6 billion acquisition of event software company Cvent.

Public market operations have major advantages for private equity groups: interest costs are often lower and they can often get much more favorable terms than private debt. But unlike private credit, the deals include a mechanism that allows banks to increase a company’s borrowing costs if market conditions change. Private lending funds also aim to be able to execute trades more quickly.

The exodus of banks from underwriting new debt followed last year’s market sell-off, triggered by the Russian invasion of Ukraine and persistent inflation. As the Federal Reserve rapidly raised interest rates, nearly every Wall Street institution, including Bank of America, Barclays and Morgan Stanley, suffered losses on the loans they had agreed to provide to their private equity clients before the markets crashed. worth.

The backlog of those deals, including the $13 billion loan that financed Elon Musk’s takeover of Twitter prompted many lenders to stop taking risky new loans altogether. Banks lost approx underwriting of $1.5 billion a debt package financing the $16.5 billion acquisition of Citrix by Elliott and Vista Equity Partners.

For riskier business, private credit remains the right choice. Among the companies in talks with private lending funds is Finastra, a financial technology firm owned by Vista Equity Partners. The company’s triple C plus credit rating is one of the lowest assigned by major rating agencies, with analysts at S&P Global warning that upcoming debt maturities “present significant rollover risk”.

Private lending funds have stepped in and are offering to provide $6 billion in loans, split between senior and junior tranches, according to those involved in the situation.

Advent and Warburg Pincus also approached private loan managers for a nearly $2 billion loan to finance the purchase of a division of healthcare company Baxter International.

“We’re seeing banks considering new underwriting for existing issuers and conservative structures, but there are still large areas of the market that are the domain of private credit,” said Michael Zawadzki, chief investment officer at Blackstone Credit.

Additional reporting by Antoine Gara