Wall Street banks flay $50 billion in buyout loans sitting on books


Wall Street banks, sitting on about $50 billion in buyout loans they need to sell to investors, are testing the waters to see if they can start offloading debt.
Credit Suisse Group AG is seeking to sell a $3.35 billion loan to fund the takeover of car dealership software company CDK Global Inc.
The sale of CDK is a test of how banks can manage loans they have previously committed to fund buyouts by private equity firms. As inflation fears turned into recession fears in 2022, loan prices fell sharply, making debt harder to sell. The average loan was worth 94.8 cents on the dollar on Wednesday, down from 93.8 cents on May 25, but about 5 cents below the level at the end of last year.
The recent slight gains came after the Federal Reserve signaled it may suspend rate hikes later this year, giving investors more hope that a recession will be averted. That could give banks an opening to sell about $50 billion in loans and about $30 billion in bonds on their books to fund the takeover, according to recent estimates from Deutsche Bank AG.
Banks now face tough choices: they can cut the prices of the loans they have committed to make and possibly incur losses in the process. Or they can keep their loans committed and hope that short-term losses will turn into gains in the future if the market improves. Or they may try to sell the debt to private lenders who often demand high returns but can close deals quickly and quietly.
“What I’m really looking for is how many more deals will be launched in the wake,” said Lauren Basmadjian, co-head of liquid credit at Carlyle Group Inc., referring to the sale of CDK.
The $50 billion in loans the banks have on their books are manageable by historical standards. During the financial crisis of 2007-2009, banks were at one point estimated to be holding some $237 billion in loans when the music stopped, according to CreditSights. But post-crisis financial regulations have made it harder for banks to take outsized risks.
“There is some pain in the system, but it’s a far cry from the pain that banks suffered around the financial crisis,” said Bruce MacKenzie, head of high yield capital markets in the Americas at UBS Group. AG during a recent call with the media. “But it does give credit committees and banks a bit more caution about how they underwrite.”
One of the reasons loan selling has become more difficult in recent weeks is that the biggest buyers of debt, fund managers who bundle loans into bonds called secured loan obligations, have been less active. Year-to-date CLO issuance at the end of May was around 10% lower than the same period in 2021, according to data compiled by Bloomberg.
In this environment, banks are reducing their ambitions to sell loans, in case demand is lukewarm. Credit Suisse told investors it was selling $3.35 billion in CDK loans, after earlier discussing selling up to $4.35 billion.
The bank could instead try to raise the remaining $1 billion in the junk bond market, although the final financial package is still uncertain, Bloomberg previously reported.
The proposed interest payments on the loan have increased during the sale process, initially equal to the overnight secured funding rate plus about 4.5 percentage points, and this week to SOFR plus somewhere between 4.75 percentage points and 5 percentage points. The loan is offered at a discounted price of around 95 cents to 96 cents on the dollar.
Banks and buyout companies are also turning to private credit. The riskiest part of CDK’s funding, $865 million originally secured in debentures, was sold by Goldman Sachs Group Inc. to its asset management division.
There’s a lot more to do outside of big buyout deals, Carlyle’s Basmadjian said, including follow-on deals and refinancing for next year’s maturities.
“If the market shows it’s open, we’ll see more,” Basmadjian said.
Blackstone Inc is marketing a $400 million secured loan bond to take advantage of falling prices in the leveraged loan market, according to people familiar with the matter.
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