Banks Are Lending More in Less-Lucrative Transactions

Banks globally are finding there are fewer corporate acquisitions to finance now, forcing lenders to focus on a less lucrative business: giving loans to corporations looking to cover rising expenses amid high inflation.

According to data compiled by Bloomberg, the value of global mergers and acquisitions (M&A) has dropped about 29 percent compared with the same time a year ago, amid widespread market volatility that’s left firms dealing with soaring interest rates. That’s led to a drop in new business for banks arranging high-grade loans backing deals, with a 55 percent slump in the U.S. year-to-date compared with the same period in 2021 and a similar plunge in Europe.

It adds to a worrying picture for lenders, with Citigroup Inc. recently warning that the deal-making slowdown is here to stay. Although banks are replacing some of the lost business by arranging funding to cover companies’ surging expenditures as input costs rise, that type of transaction is far less profitable than arranging loans backing what are often huge M&A deals.

“The lack of M&A-driven loan transactions will have a profound impact on the lending businesses of banks and debt funds,” said Alexander Schilling, who advises on loans as a partner at law firm Noerr. “Due to their bigger size and higher margin compared to general corporate lending transactions, M&A-driven loans are substantial for the profitability of a bank’s lending business.”

The hit to banks’ investment-grade businesses comes as their leveraged-loan desks struggle with losses from committed buyout financings they’ve had to sell at discounts or keep on their balance sheets. That’s because investor appetite for riskier credits has waned as the prospect of an economic recession grows.

The U.S. has watched risk appetite disintegrate from markets as big deals failed to meet expected demand. Banks realized roughly $600 million of losses after offloading financing commitments for the buyout of Citrix Systems Inc. Wall Street firms are set to fund the debt for the leveraged buyout (LBO) of Nielsen Holdings themselves. A group led by Bank of America Corp. and Barclays Plc had to scrap a $3.9 billion debt sale for the buyout of an Apollo Global Management Inc.–backed telecom business called Brightspeed.

Investment-grade loan sales aren’t completely quiet, though, with squeezed companies seeking additional funds to cover surging expenditures. Commodities trading houses and power-producing companies have been racking up extra debt amid soaring energy prices. Meanwhile, Axpo Holding AG, Mercuria Energy Group Ltd., and Trafigura Group have all added additional loans this year.

“The gap from missing M&A–driven finance is filled mostly by complementary liquidity requirements coming from the industry, in order to deal with higher procurement prices,” said Reinhard Haas, head of syndicated finance at Commerzbank AG. “Especially in the energy sector and from commodity traders, we see an enhanced demand that translates into new transactions.”

In the U.S., acquisition loans are still being made, albeit less frequently. Oracle Corp. opted to borrow additional funds from a term loan to refinance the bridge loan it borrowed to pay for its acquisition of Cerner Corp. instead of replacing it with a new investment-grade bond. Whirlpool Corp. also raised a $2.5 billion term loan in September.

“Stability and visibility” in the economy and “recovery in equity and bonds markets may help the M&A market recover,” according to Lucie Campos Caresmel, head of EMEA corporate loan distribution with Credit Agricole Corporate & Investment Bank.

Elsewhere in credit markets:

Americas

Three borrowers that were looking to sell bonds in the U.S. investment-grade primary market on Tuesday stood down.

• Banks revised the debt structure and formally sweetened pricing on the $2.25 billion debt offering for Latam Airlines Group SA after they struggled to find buyers for the company’s bankruptcy exit financing.
• Bob Michele, the outspoken chief investment officer of J.P. Morgan Asset Management, has a warning: The relentless dollar could forge a path to the next market upheaval.
• Bang Energy, the energy drink maker beset by lawsuits, filed for Chapter 11 protection in Florida on Monday with plans to revamp its distribution model.
• In the IG market, corporate bond sales are becoming tougher to predict amid a spike in volatility, leading dealers to overestimate volume in four of the last nine months, according to data compiled by Bloomberg.

EMEA

Germany and the European Union (EU) led the action in Europe’s primary market on Tuesday, as seven high-grade borrowers priced almost €20 billion worth of bonds.

• The EU raised €11 billion from a tap of existing notes alongside a new 20-year offering.
• Swedish power firm Vattenfall AB sold a three-part deal comprising fixed and floating notes in its first syndicated offering in the currency since June 2021, according to data compiled by Bloomberg.
• The corporate hybrid bond market may be headed for a higher run rate of missed first-calls in the near future, with Aroundtown, EDF, Naturgy, and Balder all potential hazards in the next six months, according to Bloomberg Intelligence analysis.

Asia

A lone issuer braved the global bond market rout with an offer to raise dollars on Tuesday. Oriental Capital is tapping its 7 percent 2025 bond, according to a person familiar with the matter.

• Demand for new dollar bonds issued by borrowers in Asia, excluding Japan, rose in September despite an intensifying global bond rout. Orders for such offerings were 4.41 times their issuance size, up from 3.43 times in August and the highest since June, according to Bloomberg-compiled data of available deal statistics.
• Moody’s has withdrawn Kaisa Group Holdings Ltd and Evergrande’s Ca corporate family ratings, it said in separate statements. It removed Evergrande’s due to “insufficient or otherwise inadequate information to support the maintenance of the ratings.”

—With assistance from Jan-Henrik Förster & Hannah Benjamin-Cook.

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