By Helen Thomas and Nicole Bullock in New York
US investment banks are facing losses on financing commitments for buy-outs and other deals struck before the recent market turmoil, as they sell down about $25bn in loans and junk bonds.
Banks have had to make concessions to entice a broader range of investors to buy loans linked to mergers and acquisitions, including offering discounts, amid deepening concerns about the US economy.
With a significant pipeline of debt sales planned for the autumn, market participants have been waiting to see whether banks would choose to shift commitments, even at a loss, or hold paper in the hope of an improvement in sentiment.
?There is clearly less buyer capacity in the loan market,? said one financier. ?But Wall Street is willing to sell paper at levels where they take a small loss, rather than have an overhang.?
Bankers said they were being careful not to overwhelm the leveraged finance markets, pointing out they were not confronting a situation comparable to the financial crisis when banks were left holding hundreds of billions of dollars of so-called ?hung loans?.
?We have a manageable amount of risk on the books and we are methodically moving that risk,? said Robert Schleusner, co-head of global lever-aged finance at Bank of America Merrill Lynch.
But deals backed by private equity groups have struggled to win support among investors. A loan to fund Providence Equity Partners? purchase of Blackboard, an education company, was sold at a higher-than-expected yield and a substantial discount to par value.
Blackboard?s loan was offered to investors at 92 cents on the dollar, according to Standard & Poor?s LCD, a debt research company. Financing for KKR?s purchase of Go Daddy, a website company, also required a discount.
Such discounts, as well as protection for investors should a loan be repaid early, are designed to encourage junk bond investors to buy the loans, market participants said. But deals are getting done, others added, unlike in some periods of market dislocation where banks held back from launching debt sales.
?The market is differentiating between corporate deals and sponsor-backed deals which tend to have higher leverage,? said Richard Zogheb, co-head of Americas capital markets origination at Citigroup, pointing to strong investor demand for corporate deals, such as loans backing Sealed Air?s purchase of Diversey. ?But the backlog is fairly moderate in size and we expect that it will all get absorbed,? he added.
Since the Federal Reserve said last month it would keep interest rates near zero for two years, there has been little impetus for retail investors to buy loans. Previously investors betting on an economic recovery and rising rates had been putting money into loans, which pay a floating rate.
While inflows have resumed for mutual funds that buy junk bonds, net redemptions have persisted for funds specialising in leveraged loans.
The market is now focused on the financing for Apax? $6.3bn buy-out of Kinetic Concepts, the wound-care specialist.
Underwriters are asking for extra flexibility in new financing commitments, said financiers, in case the Kinetic deal unsettles markets. Higher pricing and tougher terms for new lending could cause auctions to be slowed or postponed as private equity groups struggle to meet their target returns.
? The Financial Times Limited 2011