Market stabilization sees banks prepare to sell billions of junk debt

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(Bloomberg) – Banks are preparing to offload billions of dollars in junk debt to support leveraged buyouts, counting on emerging market stability to finally dump underwriting for firms such as Wm Morrison Supermarkets Plc and Unity of tea from Unilever Plc.

Lenders including Bank of America, Barclays and Goldman Sachs, among others, are seeking to sell about $37 billion in subscriptions, much of it on their balance sheets since last year, planning launches after the Easter holidays. .

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The market cooled towards the end of 2021, due to the Omicron variant of Covid-19 pushing back planned deal launches. Despite a more positive start to 2022, volatility has surfaced again as inflation has risen, raising bets on interest rate hikes. Then, Russia’s invasion of Ukraine virtually shut down both the high-yield bond and leveraged loan market from late February, preventing banks from selling risk.

With secondary leveraged loan prices rising again from their mid-March nadir, liquidity levels improving and the initial shock of the Russian invasion dissipating, the market is now experiencing some stabilization and investors seem ready to put the money back to work.

A representative for Goldman Sachs declined to comment. Bank of America and Barclays did not immediately respond to a request for comment.

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“The high yield market has tightened significantly and is trading inside where it was on Feb. 24 when the war started,” said Zachary Swabe, portfolio manager at UBS Asset Management. “By definition, the market is more stable. Spreads are at levels where the primary restart process, banks have an incentive to issue and the market feels more comfortable with primary credit risk pricing likely in the near future.

Bank of America and Goldman Sachs last week began pre-marketing in the United States and Europe of a $1.85 billion leveraged loan supporting Temasek Holdings Pte’s acquisition of Element Materials Technology. and are preparing for a general syndication process, in what will be the first European funding test of investors’ appetite for large-scale buyout funding. Although largely denominated in dollars, there is also a $385 million term loan B denominated in euros.

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Supermarket sweep

Banks are preparing to launch the remaining £4.4bn ($5.8bn) of debt backing CD&R’s acquisition of Morrison, the biggest leveraged buyout of a UK company in more than a decade .

Financial statements for the fourth quarter, ending January 31, 2022, will be ready in the coming weeks, signaling a launch after Easter. The deadline for using the third quarter results, which covered the months up to October 31, ended in mid-March.

Due to its size, Morrisons will need to attract the attention of investors in euro and sterling loans and bonds. A number of changes have already been made to take account of deteriorating conditions since its underwriting, including the sale of the £1.2 billion Junior Notes in February to the Canada Pension Plan Investment Board and a reduction in the amount of the Sterling Senior Secured Notes.

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Elsewhere, banks are preparing to launch a 2.1 billion euro ($2.3 billion) loan after Unilever agreed to sell some of the world’s best-known tea brands, from Lipton to PG Tips , to buyout firm CVC Capital Partners, in one of the biggest markets last year. carve-outs by a European company.

Mergers and acquisitions transactions

Bank of America, Jefferies and Wells Fargo are looking to launch the sale of 3 billion euros in senior debt financing to follow the takeover of Intertrust by CSC, while there is also 1 billion euros in debt financing supporting the acquisition of Worldline by Apollo Global Management Inc. payment terminals unit.

A gigantic $16 billion financing for Citrix Systems LBO is also set to launch after Easter, with at least around $1 billion coming in Europe.

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Other significant deals lenders will need to focus on selling are $5.5 billion financing for 3G’s purchase of Hunter Douglas and £2.1 billion financing for the company’s acquisition. online gambling company 888 Holdings Plc from the international operations of bookmaker William Hill.

If investors put the money to work in these deals, it will allow banks to finally clean up their balance sheets, making room for new underwriting to congregate, although these are likely to come with more protections and at a higher cost to private equity firms. .

“There’s no reason the market shouldn’t fund another leveraged buyout with senior and subordinated paper,” Swabe said. “They might just have to pay for it.”

Elsewhere in the credit markets:

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EMEA

Shares of Telecom Italia fell 7.4% on Monday after people familiar with the matter said KKR & Co. planned to drop its proposed 10.8 billion euro takeover if the company did not grant it due diligence required. since last November.

Testing company Element Materials Technology is in the market with $1.825 billion in term loans, of which $400 million equivalent will be denominated in euros. There is a call to lenders on April 4. The Bloomberg Pan-European High Yield (Excluding Financials) Total Return Index rose on Friday, up 0.06% to 345.58.

Asia

Chinese high-yield dollar bonds gained another 1 to 3 cents against the dollar on Monday, credit traders said, after a five-day rise in a Bloomberg index. Developer bonds led the gains, traders said.

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Fitch Ratings has placed Chinese automaker KWG Group’s long-term issuer default rating at B+. and senior unsecured rating and outstanding bonds of B+/RR4, on Watch Negative rating, according to a statement. This action reflects a delay in the publication of the company’s audited financial statements. Logan Group’s February 2023 dollar bond is set to see its biggest rise since Jan. 19, according to prices compiled by Bloomberg.

Americas

More than 100 companies around the world have delayed or withdrawn financing deals since Russia invaded Ukraine, including initial public offerings, bonds, loans and acquisitions.

Sales of U.S. high-yield corporate bonds fell to just under $3 billion last week for just four issuers, down 11% from the previous week. leveraged lending, meanwhile, performed better than other areas of credit. Scientific Games Corp. is holding a call to lenders on Monday for a $2.2 billion loan to refinance debtFunding for the takeover of CRH Plc’s Oldcastle Building Envelope unit by KPS Capital Partners could be announced this week, according to a person familiar with the matter . The exact timing is uncertain

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