By Matt Wirz And Liz Hoffman
Wall Street banks are struggling to sell billions of dollars of
loans they made to finance the corporate buyout boom, a sign that
investor appetite for riskier debt remains muted despite a robust
autumn rally in other financial markets.
The slowdown threatens to cool the surge in
mergers-and-acquisitions that has sent takeover volume in 2015 to
record levels, thanks in part to easy credit. Bank of America
Corp., Credit Suisse Group AG and Morgan Stanley are among the
banks wrestling to sell loans they made to back purchases by firms
including Lannett Co. and Apollo Global Management LLC, according
to investors.
"This is the longest sustained downturn we've seen in the
markets in a while," said Michael Kaplan, a deal-financing partner
at law firm Davis Polk & Wardwell LLP.
For now, loan investors have lost their appetite only for the
riskiest deals while relatively high junk credit ratings still
attract buyers. Investment banks are growing reluctant to back new
deals with heavier debt loads or in troubled industries like energy
and pharmaceuticals. That in turn makes it harder for potential
acquirers to capture takeover targets. The stresses contrast to a
boom in sales of debt considered less risky, or investment
grade.
The banks must sell the loans by year's end to minimize holdings
of risky assets that require capital charges under new regulations.
But buyers have lost their taste for riskier loans because prices
of such debt dropped sharply in September and October, saddling
investors with losses.
Now bankers are being forced to heavily discount the new loans
to clear their balance sheets, investors and bankers say. Banks
must make up much of the difference when loans they make are sold
at discounts by giving up their fees or taking losses, an unwelcome
prospect at a time when M&A deal-making has emerged as one of
their strongest businesses.
Morgan Stanley is laboring to sell a $1.2 billion loan it made
with other banks backing generic-drug maker Lannett's purchase of
Kremers Urban Pharmaceuticals Inc. Investor interest dried up last
week after Kremers disclosed the loss of a major customer. Loan
fund managers are increasingly leery of the drug sector because of
turmoil at Valeant Pharmaceuticals International Inc., investors
and bankers say.
Credit Suisse Group AG has been trying since early October to
distribute $525 million in loans it made with other banks for
private-equity firm Apollo's buyout of OM Group. The bank has been
unable to find buyers so far, and it is in the process of cutting
the price of the debt, investors say.
Bank of America Merrill Lynch last week reduced the price of a
$1.2 billion loan to barge operator American Commercial Lines for
its purchase of AEP River Operations LLC in an attempt to attract
loan fund managers, according to S&P Capital IQ LCD.
Banks chase acquisition financings because they pay higher fees
than standard corporate loans, but the deals come with a catch:
Because M&A transactions can take months to complete, banks
that commit to the loans run the risk of having to sell them in
choppy markets when the acquisitions eventually close.
In past decades, banks sometimes held the loans until markets
stabilized, but such warehousing became prohibitively expensive
because of high capital charges required under the Dodd-Frank law
that was passed in response to the 2008 financial crisis.
Investment banks have always tried to sell leveraged loans, which
have credit ratings below investment grade, as quickly as possible
to reduce balance-sheet risk, spokespeople for several banks
said.
While the riskiest deals, like those for Lannett, OM Group and
American Commercial Lines, go wanting, companies with relatively
high junk credit ratings of double-B "are still in very strong
demand," says George Goudelias, a loan portfolio manager at Seix
Investment Advisors, which owns about $10 billion of leveraged
loans.
Credit Suisse and a group of banks received $7 billion in orders
from loan investors for a $2.7 billion loan the lenders sold last
week for double-B rated NXP Semiconductor's purchase of Freescale
Semiconductor, according to a person familiar with the matter. Fund
managers also are eager to buy a $7.5 billion loan Bank of America
is marketing for chip maker Avago Technologies Ltd.'s purchase of
Broadcom Corp., investors said.
Bankers need demand for higher-rated deals to remain strong to
help them sell loans for even larger transactions in the pipeline.
Early next year, Dell Inc. is expected to try to raise more than
$40 billion of debt for its purchase of EMC Corp.
"There is absolutely capital available on attractive terms to
companies doing strategic financings," said A.J. Murphy, head of
global leveraged finance at Bank of America Merrill Lynch. But she
said a handful of larger, high-profile deals could squeeze some
smaller deals out of the marketplace, adding that "investors have a
lot to choose from."
All leveraged loans returned 1.27% this year through Nov. 5,
including price changes and periodic payments, according to S&P
Capital IQ LCD. But the riskiest loans with credit ratings of
triple-C or below have lost 2.85%, on average. By comparison, the
S&P 500 stock index delivered a 1.96% total return over the
same period.
Selling low-rated loans became more difficult after stock and
debt prices tumbled in August amid concern about the outlook for
global growth.
Large stock price swings also have made M&A buyers reluctant
to use their shares as a currency, prompting more to pay cash,
often prompting more borrowing. Using more cash also allows
acquirers to reap more of a merger's upside for their own
investors.
Since the start of October, 91% of global public-company
takeovers have included cash as a portion of the consideration, the
highest since the current M&A boom began two years ago,
according to FactSet.
Cash, including sums borrowed from banks and raised in debt
markets, accounts for 71 cents of every dollar committed to
takeovers in the fourth quarter to date, up from 53 cents in the
fourth quarter of last year.
Vipal Monga contributed to this article.
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(END) Dow Jones Newswires
November 08, 2015 19:42 ET (00:42 GMT)
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