Big banks sit out LBO rebound after being stung by earlier buyouts

Bank of America, Barclays and other large banks that got stuck holding billions of dollars of leveraged loans in 2022 are sitting on the sidelines this year even as the buyout market revives.

The group has become more reluctant to lead the financing for riskier buyouts, worried that the loans could get stuck on their balance sheets, bankers and buyout executives told the Financial Times.

Several were burnt last year when they struggled to find investors willing to purchase debt linked to Elon Musk’s purchase of Twitter and other deals for technology company Citrix, television ratings provider Nielsen and auto parts maker Tenneco.

Gerard Cassidy, head of US bank equity strategy at RBC Capital Markets, said banks may be nervous that deals on offer now could suffer the same fate. “There are times when you want to pay your people to play golf and not make loans,” he said. “This could be one of those times.”

BofA has slid from sixth place in last year’s LBO loan and high-yield bond underwriting league tables and fourth place in 2021 to 22nd. It has worked on just eight buyout financings this year, down from 28 in 2022 and 71 the year before that, according to Dealogic.

Barclays, meanwhile, has fallen from third place to 15th in the past year, Dealogic data showed.

The league tables have been scrambled this year by the fact that there has been a relative dearth of buyouts, which means missing just a handful of transactions can skew a bank’s position. But the poor showing of several banks reflected instead how uncertainty about the economic outlook has made them reluctant to lend.

Big banks are also avoiding deals that could draw low ratings from credit rating agencies, which could imperil demand from some of the largest loan buyers, according to bankers and private equity and private credit executives.

Instead, growing numbers of loans are being directly arranged by private credit funds themselves rather than going through a bank.

“We’ve been trying to take advantage of the current market opportunity and the current market environment,” said one senior debt capital markets banker. “The problem we’ve had is that there’s not enough volume.”

For private equity firms, the pullback by several big banks has limited the pool of potential lenders for big takeovers. It has pushed some would-be buyers to costlier debt provided by private credit funds run by the likes of Blackstone, Sixth Street and Blue Owl.

For BofA and others, being on the sidelines could cut them out of lucrative origination fees as well as the secondary trading opportunities that present themselves in the days and months that follow deals.

One executive at a large global private equity firm said BofA had been largely absent on lending to new deals over the past year. Another called bank lending to LBOs “non-existent”, saying his firm was focused instead on working with clubs of private lenders.

BofA and Barclays declined to comment.

LBO market observers said it was too soon to tell whether bankers had lost their appetite for financing risky debt, or had just opted out of the few deals that have happened this year.

BofA, for instance, ranks as the top underwriter of leveraged loans in the US, which includes all loans to below investment-grade companies, not just those tied to new LBOs, separate Refinitiv data showed. Bankers say BofA has been more focused on broader leveraged finance activity than on LBO loans this year.

But buyout executives, private credit lenders and the banks themselves have acknowledged traditional banks are wary of extending longer-term bridge financing without giving themselves flexibility to change its terms if the market shifts violently as it did in 2021 and 2022, after the Federal Reserve signalled it would begin raising rates aggressively.

That saddled a number of large banks, most notably BofA, Barclays, Citigroup and Morgan Stanley, with losses when the bonds and loans they had committed to finance dropped precipitously in value.

The banks have spent much of this year selling bonds and loans that backed the takeovers of Citrix, Nielsen and Tenneco. BofA, Barclays and Citigroup were lenders on all three transactions.

Several of the banks, including BofA, Barclays and Morgan Stanley, are also still stuck holding debt backing Musk’s takeover of Twitter, while Barclays, BofA and Citigroup continue to own debt tied to Apollo’s purchase of telecoms business Brightspeed.

Competition for new deals is slowly ratcheting up and bankers said they were closely watching new deal lending commitments to see which of their competitors were returning. KKR turned to a group of banks led by Jefferies to finance a $1.1bn loan for its takeover of book publisher Simon & Schuster.

The syndicate also included UBS, Goldman Sachs, RBC and KKR’s own capital markets arm. Missing from the list: a number of the largest banks, including BofA, Citi and Barclays.

GTCR, which won higher ratings for its purchase of a majority stake of payments technology business Worldpay, meanwhile tapped banks including JPMorgan, Goldman, Citi and Wells Fargo when it borrowed $8.65bn last month. That deal received one investment-grade rating, helping bolster investor demand.

“There are too few opportunities to chase,” said a capital markets executive at a private equity firm, who helps decide how his company bankrolls its acquisitions. “We are starting to see competitive tension really emerge.”