Banks that agreed to help finance leveraged buyouts are starting to feel the pain from a freeze in the market for risky corporate debt.
Lenders including Morgan Stanley, Bank of Ireland Group Plc and Citizens Financial Group Inc. have been forced to self-fund at least $1 billion of loans in recent weeks to ensure private-equity led acquisitions close as planned, according to people with knowledge of the matter.
Unable to syndicate the debt to institutional investors, the banks have become unintentional holders of speculative-grade loans to a filtered-water company, a pet-food manufacturer and a U.K.-based maker of audio mixing consoles for DJs, said the people, who asked not to be named because the details are private.
The loans represent only a small slice of over $30 billion in junk-rated debt that lenders may be forced to take onto their balance sheets this quarter if the market remains fragile. And while the exposure is a fraction of the commitments they held heading into the 2008 financial crisis, it nonetheless risks consuming precious capital just when banks need it most.
While the high-yield bond market is starting to show signs of thawing, the cost of borrowing has soared. That could erode the fees banks are due depending on the terms of lending commitments they agreed to before the sell-off, and expose them to losses if they’re eventually forced to offload the debt at a steep discount.
A group of lenders led by Morgan Stanley were forced to come up with $350 million at the end of March to allow Culligan NV, a filtered-water company owned by buyout firm Advent International, to close its takeover of AquaVenture Holdings Ltd., according to the people. The funded loan was smaller than the $500 million the banks had initially agreed to underwrite because AquaVenture sold its water-treatment unit to Morgan Stanley Infrastructure Partners, one of the people said.
Just a couple weeks earlier, Citizens Financial had to fund a $285 million leveraged loan it agreed to provide J.H. Whitney Capital Partners-owned C.J. Foods Inc. for its acquisition of American Nutrition Inc. In Europe, a group led by Bank of Ireland got stuck with around $400 million of debt for private equity firm Ardian’s acquisition of Audiotonix Ltd., a U.K.-based maker of mixing consoles used in music and broadcasting, according to people with knowledge of the deal.
Representatives for Morgan Stanley, Bank of Ireland, Advent and Ardian declined to comment, while Citizens Financial and J.H. Whitney didn’t respond to requests for comment.
The leveraged loan market has been shut for roughly three weeks now. While smaller financings aren’t especially painful for banks to hold, they can become difficult to offload in the broadly-syndicated market even when conditions improve, given competition from bigger, more liquid transactions.
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