Wall Street's biggest banks are sitting on US$20bn-plus of bridge loans that back buyouts of US companies, including Elon Musk's high-profile pursuit of Twitter, as credit market volatility increases and makes it much harder for banks to unload risk.
Bridge facilities supporting buyouts of Citrix Systems and Nielsen, among others, are intended to be taken out in the high-yield bond and leveraged loan markets. Yet rising inflation, recent rate hikes by central banks and dwindling liquidity have made selling new debt – especially junk bonds – next to impossible without steep discounts.
"Until inflation breaks, the windows to sell LBO bonds will be few and far between," said Bill Zox, a high-yield portfolio manager at Brandywine Global. "And the bonds will come at deep discounts and extremely high yields."
That is perhaps not a surprise in a year when high-yield bond spreads have gapped out 228bp as of Thursday.
Bridge to nowhere
Bankers saw signs of things to come earlier this month with high-yield bond offerings from Intertape Polymer Group and Entegris pricing with rare discounts. Those deals are among the reasons many banks are in no rush to offload their exposure to LBO debt, if they don't have to.
“For LBOs, in past years there was a strong incentive to go to market early," said a leveraged capital markets banker. "Now with markets the way they are, companies are taking their time and trying to take the pulse of the market."
The tens of billions of dollars of LBO debt on banks' books is nowhere near all-time highs. Nonetheless, these lenders will eventually have take out the secured and unsecured bridges in the bond and loan markets, as planned.
Bank of America, Credit Suisse, Goldman Sachs, Barclays, Citigroup and Deutsche Bank are among those that have committed to the US$7.95bn of bridge facilities that back Vista Equity Partners and Elliott Investment Management's US$16.5bn purchase of Citrix. In addition to a US$4bn senior secured bridge and a US$3.95bn unsecured bridge, the cloud computing company's deal includes a US$7.05bn senior secured term loan and a US$1bn revolver, an SEC filing shows.
US media company Tegna has US$4.2bn in bridge facilities backing its US$8.6bn buyout by Standard General. Royal Bank of Canada, Bank of America, Goldman Sachs, Truist, Credit Suisse and Mizuho are among the banks that have committed to the debt financing.
Tough market
Social media outfit Twitter has US$3bn in senior secured bridge commitments and US$3bn in senior unsecured bridge commitments for its pending sale to Musk. Morgan Stanley is one of the banks that has committed to the debt financing.
Deals for Nielsen and Tenneco will require banks to take out US$2bn and US$3bn of bridge loans, respectively, in the bond and loan markets.
One mitigating factor is that banks can syndicate bridge loan risk before hitting longer-term debt markets.
Yet these firms have still committed to selling bond offerings in a tough market.
Intertape's US$400m bond offering sold at 82 to yield 14.36% on June 15. The next day Entegris sold a US$895m offering at 90.83 to yield 7.50%.
Those two deals set the tone for last week, when no new issues priced.
"No doubt its tougher to finance LBOs today and much more expensive," said Greg Zappin, a high-yield portfolio manager at Penn Mutual Asset Management.