Banks lend more in less lucrative deals

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Banks around the world are finding that there are fewer business acquisitions to fund now, forcing lenders to focus on a less lucrative business: lending to companies looking to cover rising expenses in an environment of high inflation.

According to data compiled by Bloomberg, the value of global mergers and acquisitions (M&A) fell around 29% from the same period a year ago, amid widespread market volatility that has left companies facing to soaring interest rates. This has led to a decline in new business for banks dealing in higher quality loans, with a 55% drop in the United States since the start of the year compared to the same period in 2021 and a similar fall in Europe. .

This adds to a worrying picture for lenders, with Citigroup Inc. recently warning that the slowdown in transactions is here to stay. Although banks replace some of the lost business by arranging finance to cover growing business expenses as input costs rise, this type of transaction is far less profitable than the back-to-back loan arrangement that is often d huge M&A deals.

“The absence of M&A-driven lending transactions will have a profound impact on the lending activities of banks and debt funds,” said Alexander Schilling, who advises on lending as a partner at the firm. lawyers Noerr. “Because of their larger size and higher margin relative to general corporate lending operations, M&A loans are important to the profitability of a bank’s lending business.”

The hit to the banks‘ prime businesses comes as their leveraged lending desks grapple with losses from committed buyout funding they had to sell at a discount or keep on their balance sheets. Indeed, investors’ appetite for riskier credits has faded as the prospect of an economic recession grows.

The US saw risk appetite disintegrate from the markets as large deals failed to meet expected demand. Banks realized about $600 million in losses after forgoing funding commitments for Citrix Systems Inc. buyout Wall Street firms ready to self-fund debt for Nielsen leveraged buyout (LBO) Holdings. A group led by Bank of America Corp. and Barclays Plc had to to abandon a $3.9 billion debt sale for the takeover of an Apollo Global Management Inc.-backed telecommunications company called Brightspeed.

Sales of investment-grade loans aren’t completely silent, however, with pressured businesses seeking additional cash to cover soaring expenses. Commodity trading companies and power generation companies have racked up additional debt amid soaring energy prices. Meanwhile, Axpo Holding AG, Mercuria Energy Group Ltd. and Trafigura Group have all added additional loans this year.

“The gap to missing M&A-focused funding is primarily filled by additional liquidity needs from industry, to meet higher purchase prices,” said Reinhard Haas, head of syndicated financing at Commerzbank AG. “Particularly in the energy sector and among commodity traders, we are seeing increased demand which translates into new transactions.”

In the United States, acquisition loans are still granted, although less frequently. Oracle Corp. elected to borrow additional funds from a term loan to refinance the bridge loan it borrowed to pay for its acquisition of Cerner Corp. instead of replacing it with a new higher quality bond. Whirlpool Corp. also raised a $2.5 billion term loan in September.

“Stability and visibility” in the economy and “recovery in equity and bond markets may help the M&A market recover,” according to Lucie Campos Caresmel, head of corporate loan distribution for the EMEA zone at Credit Agricole Corporate & Investment Bank.

Elsewhere in the credit markets:

Americas

On Tuesday, three borrowers who were looking to sell high-quality U.S. primary market bonds pulled out.

  • Banks have revised the debt structure and officially softened the prices of the $2.25 billion debt offer for Latam Airlines Group SA after it struggled to find buyers for the company’s exit financing from bankruptcy. society.
  • Bob Michele, the outspoken chief investment officer of JP Morgan Asset Management, has a warning: The relentless dollar could set the stage for the next market upheaval.
  • Bang Energy, the energy drink maker embroiled in lawsuits, filed Chapter 11 protection in Florida on Monday with plans to revamp its distribution model.
  • In the IG market, corporate bond sales are becoming harder to predict amid high volatility, leading dealers to overestimate volume in four of the past nine months, according to data compiled by Bloomberg. .

EMEA

Germany and the European Union (EU) led the action in the European primary market on Tuesday, as seven prime borrowers appraised nearly 20 billion euros worth of bonds.

  • The EU raised €11 billion from an existing banknote tap alongside a new 20-year supply.
  • Swedish power company Vattenfall AB sold a three-part deal comprising fixed and floating notes in its first syndicated offering in the currency since June 2021, according to data compiled by Bloomberg.
  • The hybrid corporate bond market could be heading for a higher first-call miss rate in the near future, with Aroundtown, EDF, Naturgy and Balder all potential dangers over the next six months, Bloomberg analysis shows. Intelligence.

Asia

Only one issuer braved the global bond market rout with an offer to raise dollars on Tuesday. Oriental Capital is tapping its 7% 2025 bond, according to a person familiar with the matter.

  • Demand for new dollar bonds issued by borrowers in Asia, excluding Japan, rose in September despite the intensification of the global bond rout. Orders for such deals were 4.41 times their issue size, down from 3.43 times in August and the highest since June, according to data compiled by Bloomberg from Available Transaction Statistics.
  • Moody’s withdrew the Ca family of companies ratings of Kaisa Group Holdings Ltd and Evergrande, it said in separate statements. It removed Evergrande due to “insufficient or otherwise inadequate information to support maintaining the ratings.”

—With help from Jan-Henrik Förster & Hannah Benjamin-Cook.

Copyright 2022 Bloomberg. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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