Bank of America, Barclays, and other large financial institutions that were stuck with billions of dollars of leveraged loan in 2022 have sat on the sidelines during this year’s buyout boom.
Bankers and executives in the buyout industry are concerned that they may be stuck with the debt if the group leads the financing of riskier buyouts.
Many were burned last year , when they couldn’t find investors to buy debt tied to Elon Musk’s purchase of Twitter as well as other deals with technology company Citrix and television ratings provider Nielsen.
Gerard Cassidy is the head of equity strategy for US banks at RBC Capital Markets. He said that banks might be worried about deals being offered now. He said that there are times when it’s better to pay people to golf than to make loans. This could be a time like that.
BofA dropped from fourth to 22nd place last year in the league tables for high-yield bonds and LBO loans. According to Dealogic, it has only worked on eight finance this year. This is down from 28 financings in 2022 and 70 the year prior.
Dealogic data revealed that Barclays has dropped from third to 15th place in the last year.
This year, the league tables were thrown off by a relative lack of buyouts. Missing a few transactions can have a significant impact on a bank’s performance. The poor performance of some banks was due to their reluctance to lend because they were uncertain about the economy.
According to private equity and credit executives, bankers, and big banks, they avoid deals that might result in low credit ratings. This could threaten the demand of some of the biggest loan buyers.
Private credit funds are arranging more and more loans directly, without going through banks.
One senior debt capital market banker said, “We have been trying to take full advantage of the market environment and current opportunities.” The problem is not enough volume.
The pullback of several large banks has reduced the pool for private equity firms to find lenders. This has led some buyers to seek out more expensive debt from private credit funds like Blackstone, Sixth Street, and Blue Owl.
BofA, and other banks, could lose out on lucrative origination fees and secondary trading opportunities in the weeks and months following a deal.
A large global private equity company executive said that BofA was largely absent in lending for new deals during the last year. One executive at a large global private equity firm said that BofA had been largely absent on lending for new deals over the past year.
BofA & Barclays declined comment.
LBO market analysts said that it was still too early to determine whether banks had lost interest in financing risky debt or if they had simply opted out of a few deals this year.
Separate Refinitiv data revealed that BofA is the number one underwriter in the US of leveraged loan, including all loans to companies below investment grade, and not just those linked to new LBOs. Bankers claim that BofA is more focused this year on the broader leveraged financing activity rather than LBO loans.
Buyout executives, private lenders, and banks themselves admit that traditional banks are hesitant to extend longer-term bridge loans without flexibility in changing its terms, if market conditions change violently, as they did between 2021 and 2022 after the Federal Reserve announced it would start raising rates aggressively.
This left a number large banks with heavy losses, including BofA Barclays Citigroup Morgan Stanley.
Banks have spent a lot of time this year selling loans and bonds to support the takeovers by Citrix and Nielsen. BofA Barclays, and Citigroup were all lenders in the three transactions.
Banks like BofA, Barclays, and Morgan Stanley are still holding debts related to Musk’s acquisition of Twitter. Barclays, BofA, and Citigroup also continue to hold debts tied to Apollo’s purchase of Brightspeed, a telecoms company.
Bankers are closely monitoring new deal commitments in order to determine which of their competitors is returning. KKR approached a group led by Jefferies for a $1.1bn financing loan to complete its acquisition of Simon & Schuster.
The syndicate included UBS as well as Goldman Sachs and RBC’s capital markets arm. The list is missing a few of the biggest banks including BofA Citi and Barclays.
GTCR, who received higher ratings when it bought a majority stake in payments technology company Worldpay, borrowed $8.65bn from banks such as JPMorgan Goldman Citi and Wells Fargo last month. This deal was given a investment grade rating which helped to boost investor demand.
“There are not enough opportunities,” said an executive in the capital markets department of a private equity company, who decides how to finance his firm’s acquisitions. “We’re starting to see real tensions in the marketplace.”