Investors who piled into anything and everything in the junk-debt market in recent years have begun to run in the other direction at the first sign of trouble.
The turnabout has caught Wall Street's biggest banks off guard and is increasingly leaving them on the hook for funding takeovers that investors want little part of. On Tuesday, Bank of America Corp. and Morgan Stanley were forced to shelve the debt package backing the year's largest leveraged buyout—US$5.5 billion meant to fund Carlyle Group LP's purchase of Veritas, Symantec Corp.'s data-storage business, according to two people familiar with the matter.
"There's a risk of this happening more," said Jamie Farnham, who manages about $6 billion of high-yield bonds and leveraged loans for Los Angeles-based TCW Group Inc. "The amount of the market that is un-financeable is getting larger."
Recommended For You
Fixed-income investors are fast pulling down the shutters on the riskiest deals as they brace for the Federal Reserve to raise the benchmark rate for the first time in almost a decade and the outlook for global growth darkens. That has left banks grappling with more than $15 billion of deals that money managers have rejected or demanded huge discounts to buy in recent weeks. Skittish investors could also cause those banks to think twice about putting together deals with high leverage in the future.
Bank of America and Morgan Stanley made significant revisions to the terms of the Veritas offering to entice investors, according to the people, who asked not to be identified because the information isn't public. It didn't work, leading the banks to postpone the offering in hopes of bringing it back when market conditions are more amenable, the people said.
One investor said he was approached three times in the last week by a credit salesman who asked how deep a discount he needed to commit to the deal. Unloading the debt at steep discounts can eat into underwriting fees, and if large enough, can create losses for banks.
"Symantec continues to expect the sale of Veritas to close by Jan. 1, as previously announced," said Noah Edwardsen, a Symantec spokesman. "There's no financing contingency associated with the closing."
Representatives for Bank of America, Morgan Stanley, and Carlyle declined to comment.
Barclays Plc, Citigroup Inc., Credit Suisse Group AG, Goldman Sachs Group Inc., Jefferies Group LLC, and UBS Group AG were the other banks involved in raising the debt, according to data compiled by Bloomberg.
"That risk has to be held on bank balance sheets at a time when they need to hedge," said Gary Herbert at Brandywine Global Investment Management. "It's a challenging environment."
The average price of leveraged loans in the secondary market has plunged below 90 cents on the dollar, to a four-year low. Investors are making their preference clear in high-yield bonds, gravitating toward the top rungs of creditworthiness while abandoning the lower-rated offerings.
Worries About Investment Targets' Cash Flow
Investors are worried that highly levered companies won't have enough cash flow to pay down debt should the economy begin to falter, said Bradley Rogoff, the New York-based head of global credit strategy at Barclays.
Negative headlines have also proved to be triggers for investor unease. At least two big deals involving drugmakers got a working over from investors amid a mushrooming scandal at Valeant Pharmaceuticals International Inc., one of the biggest debt issuers in the market.
Morgan Stanley is still looking to place about $1.2 billion of Lannett Co.'s debt for an acquisition and Goldman Sachs sold a Concordia Healthcare Corp. loan at 94.5 cents on the dollar.
"In a search for yield, demand for low-rated companies over the past several years has been mostly strong," said Christina Padgett, head of North American leveraged finance at Moody's Investors Service. "In 2015, we've seen investors become more selective based on credit quality."
© 2025 ALM Global, LLC, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.
