Liquidity is beginning to return to the leveraged-loan portfolios of bulge-bracket banks, but they’re paying a price to unfreeze their gargantuan positions. Banks on both sides of the Atlantic have begun trying to offload hung loans by discounting them and extending credit to financial buyers.
For banks, the situation is certainly far from ideal. Not only are they selling assets at discounts but buyers are being offered the opportunity to buy specific deals, allowing them to cherry-pick higher-quality assets. The banks have little choice, however. This is a pronounced bear market for leveraged loans, and the par values of even the highest-quality credits have fallen by 10 cents or more.
“By selling at anything that resembles the current trading levels, banks are taking losses,” said a senior banker at one of the firms involved. “The positive is that they are cleaning up their balance sheets and freeing up capital to underwrite new deals.”
Following the lead of Citi, which extended $9.5 billion of credit to the buyers of a $12 billion portfolio, Deutsche Bank has put a $5 billion to $8 billion leveraged loan portfolio up for sale to pare its exposure to LBO-backed debt. Royal Bank of Scotland has also been actively marketing parts of its backlog over the past few weeks and has significantly reduced its long positions on 2007-era deals. Both banks are major players in leveraged finance, and the concessions are indicative of capitulation, according to market participants.
All of these banks actively participated in the big-ticket LBOs of 2006 and 2007, and they were left with huge loans that no one wanted to buy. By the end of 2007, for instance, Deutsche Bank still had $57 billion of leveraged finance exposure.
Deutsche Bank is marketing its portfolio to at least 15 buyout shops as well as other institutional investors.
The Deutsche Banke portfolio includes bonds and loans backing buyouts such as Harrah’s Entertainment, Penn National Gaming, CDW, Ceridian, US FoodService and First Data Corp.
Deutsche Bank is offering leverage at LIBOR plus 100 basis points to buy loans offered in the mid-to-high 80 cents on the dollar. It is expected to complete the sale of the portfolio before the end of its second quarter. RBS is understood to be offering total return swaps lines and credit-linked notes to investors looking to leverage their investments, although not all buyers are opting to avail themselves of financing.
Some sponsors have taken advantage of the situation to buy up debt backing their own deals. French sponsor PAI is understood to have bought part of the €325 million ($517 million) second-lien tranche of Lafarge Roofing at 65 cents on the dollar. Danish telecom company TDC, which was bought by an
In practice, sponsors are only hampered by internal mandates that limit exposure to any one credit when it comes to buying debt associated with their own portfolio companies.—Michelle Sierra and Donal O’Donovan. Sierra and O’Donovan cover leveraged lending for IFR, a sister publication of Thomson Reuters.