Representatives for Bank of America, Credit Suisse and Goldman Sachs declined to comment.
In the UK take-private deal of Wm Morrison Supermarkets Plc, a group of underwriters led by Goldman Sachs has already racked up losses in excess of 125 million pounds ($153 million) by offloading chunks of the financing at steep discounts. The pain is set to deepen as lenders prepare to sell a portion of the 2.2 billion pounds of loans still sitting on their books at a discount in the low-to-mid 90s, people with knowledge of that deal said.
Other challenging transactions include Standard General’s buyout of media company Tegna Inc., Apollo Global Management Inc.’s acquisition of auto parts maker Tenneco Inc., and Clayton, Dubilier & Rice’s takeover of metal roofing company Cornerstone Building Brands Inc., according to the people. Banks started informally sounding out investors on the Cornerstone financing a few weeks ago but the transaction is yet to emerge.
“Banks agreed to finance deals months ago and we’ve had a massive shift in expectations,” said Nichole Hammond, a senior portfolio manager at Angel Oak Capital Advisors. “The uncertain economic backdrop is causing investors to be much more selective and they want to be paid more for the risks they are taking.”
Risky Business
The scale of the problem will become clearer when banks release second-quarter earnings. Several in Europe have opted to keep lending commitments on their balance sheets in order to avoid crystallizing losses while hoping that markets could turn around, according to the people.
That’s occurred in the US as well. A group of banks led by Bank of America ultimately self-funded a $615 million loan supporting Bain Capital’s buyout of VXI Global Solutions, after failing to place the debt with institutional investors.
Earlier in the year, sponsors were able to turn to cash-rich private lenders to place the riskiest piece of their buyout financings. But it is unclear how much appetite shadow lenders -- and more opportunistic ones like hedge funds -- will have in the coming months.
Bankers are required to mark commitments at levels where they think the debt could clear the market even if they haven’t sold it yet. In the first quarter of 2020, for example, JPMorgan Chase & Co. and Credit Suisse each took hundreds of millions of writedowns related to acquisition deals that they had agreed to finance before a pandemic-induced freeze in credit markets.
They were able to recoup most of those losses thanks to the Fed’s historic intervention to support the economy and the flow of credit. Today, as central bankers battle the highest inflation in four decades, market practitioners say it is more difficult to envisage a bullish scenario where debt values recover quickly.
“A lot of smart people think it’s going to get worse,” said Farley at Kramer Levin.