Buyout debt: The moving business gets back to work

On Wall Street, “backing up the truck” can refer to taking advantage of an excellent buying opportunity. Pimco, the $1.8tn California-based money manager, has bought more than €1bn worth of loans from Barclays and Bank of America. These helped fund the leveraged buyout of the Worldline payments terminals business.

Banks fancy themselves to be in the moving business, not the storage business. They commit financing to LBOs and then syndicate this bridge debt to specialised buyers typically in the form of both loans and bonds. The fees they charge and the pricing range they offer to private equity groups should mitigate any credit risks from interest rate and credit spread volatility.

Banks have struggled this year to unload bridge loans that they pledged on deals announced before credit markets went all wonky. Leveraged loan prices have drifted down to about 90 cents on the dollar, pushing up effective annual yields to around 10 per cent. Opportunistic investors such as Pimco see a balancing of risk and reward in fixed-income markets, enabling it to solve the problems of these two banks — at the right price.

Overall bank exposure became clearer this week after US banks released their quarterly earnings. Most reported that they had marked losses of a few hundred million dollars each, a relatively modest amount given some have balance sheets worth hundreds of billions of dollars.

Leveraged loans did concern banks in the wake of the financial crisis — though these were not their biggest problem. JPMorgan chief executive Jamie Dimon estimates today that the overall volume of leveraged loans on bank balance sheets is $100bn, a fifth of that 14 years ago. Moreover, banks have much larger balance sheets buffered with more capital.

Private equity sponsors themselves — such as Apollo, Blackstone and TPG — cleverly scooped up discounted bridge loans from teetering banks in 2008. These senior secured loans later handily rebounded in price. Pimco hopes for similar out-turns, knowing full well that some movers do not have the appetite for storage.