Investment banks are facing big losses on leveraged buyouts they agreed to finance before markets soured, further chilling the outlook for deal activity.
Bank of America Corp., Credit Suisse Group AG and Goldman Sachs Group Inc. are among the banks that could collectively lose billions of dollars on buyout loans they agreed to provide when demand for the debt was running high.
Lenders generally parcel out leveraged loans to institutional investors such as mutual funds and collateralized loan obligation managers, as well as to other banks. When markets go south before, they can do so, lenders risk getting stuck with paper they must discount heavily to move.
Sellers of newly issued buyout debt were receiving an average of 94.8 cents on the dollar as of June 23, down from 99.2 cents at the end of January, according to Leveraged Commentary & Data.
That spells trouble for deals like the take-private of cloud-computing company Citrix Systems Inc., the largest private-equity-backed leveraged buyout in the U.S. so far this year. The deal, signed in January before the selloff in stocks and bonds accelerated, is to be funded with about $15 billion worth of debt, some of which is expected to be sold this summer.
Should markets not improve by then, the banks and other lenders in the deal collectively face as much as $1 billion in losses, according to people familiar with the matter.
“Lenders are finding they need to sell debt at a deeper discount than anticipated,” said Byung Choi, a partner at Ropes & Gray LLP who helps private-equity firms arrange deal financing.
That is stemming banks’ appetite to finance new deals. Leveraged loans have become more expensive and harder to come by for private-equity investors, which have traditionally used the debt as the source of most of the capital to fund their biggest takeovers.
As a result, LBO activity has fallen sharply. About $138 billion worth of the deals have been struck by private-equity firms in the U.S. so far this year, down nearly 20% compared with the same period in 2021, according to data provider Dealogic.
