Stabilizing Market Sees Banks Prep Sale of Billions in Junk Debt

Banks are gearing up to offload billions of dollars in junk debt backing leveraged buyouts, counting on the nascent stability in the market to finally get rid of underwrites for businesses such as Wm Morrison Supermarkets Plc and Unilever Plc’s tea unit.

Lenders including Bank of America, Barclays and Goldman Sachs, among others, are looking to sell down about $37 billion of underwrites, much of which has been sitting on their balance sheets since last year, earmarking launches for after the Easter break.

The market cooled toward 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 once again emerged as inflation surged higher, driving up bets on interest-rate hikes. Then Russia’s invasion of Ukraine all but shut both the high-yield bond and leveraged-loan market from late February onwards, making it impossible for banks to sell down risk.

With secondary prices of leveraged loans rising again following their mid-March nadir, improved liquidity levels and the initial shock of the Russian invasion dissipating, the market is now seeing a degree of stabilization and investors appear ready to put money to work again.

A representative for Goldman Sachs declined to comment. Bank of America and Barclays didn’t immediately respond to a request for comment.

“The high-yield market has tightened significantly and is trading inside of where it was on February 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 process of primary restarts, banks are incentivised to issue and the market feels more comfortable with pricing primary credit risk probably in the near future.”

Bank of America and Goldman Sachs began pre-marketing in the U.S. and Europe last week a $1.85 billion leveraged loan backing Temasek Holdings Pte’s acquisition of Element Materials Technology and are gearing up for a general syndication process, in what will be the first test of European investor appetite for a large-scale buyout financing. Although largely dollar-denominated, there is also a $385 million, euro-denominated term loan B.

Supermarket Sweep

Banks are readying to launch the remaining 4.4 billion pounds ($5.8 billion) of debt backing CD&R’s acquisition of Morrison, the largest leveraged buyout of a British company in over a decade.

Financials for the fourth quarter, ending Jan. 31 2022, will be ready within the next couple of weeks, signaling a post-Easter launch. The deadline for using third-quarter earnings, which covered the months to October 31, ended mid-March.