US banks hit by discounted corporate bond sales

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Wall Street banks are taking heavy losses on corporate bond deals signed before the latest financial market downturn as investors demand bigger discounts and higher yields to lend to companies.

When banks accept bond sales on behalf of companies, they usually set a maximum interest rate that investors can expect to receive in exchange for buying the debt, taking into account a certain flexibility in the event of market developments.

But markets fell far more than expected in 2022 as high inflation, war in Europe and tight supply chains were resolved by central banks raising borrowing costs and pulling back large debt programs. purchase of debt. A high-yield bond index managed by Ice Data Services has fallen nearly 13% so far in 2022.

In turn, investment banks have slashed corporate bond prices in an effort to attract buyers – by gouging their underwriting fees. “Almost every transaction that has been underwritten will have to come with a discount and underwriters will have to pay for it,” said a banker at a major US bank.

Packaging group Intertape Polymer, which has a poor credit rating, borrowed $400 million from investors last week at an interest rate of 10%. The figure marked the upper end of a previously agreed cap the company was willing to pay buyers of its bonds, when a group of banks led by Deutsche Bank agreed to underwrite the deal in March, according to people familiar with the funding. .

Yet even a 10% rate was not attractive enough to attract lenders after the recent selloff in bond markets, which led Deutsche to lower the price of the bond to 82 cents on the dollar. By lowering the price, the overall yield offered – which moves in the opposite direction – rose to over 14%.

Bankers must pay the difference when they choose to reduce the price of a bond issue to which they have already committed. Several bankers said that for deals signed during the Intertape era, there would be about 2 cents of discount allowed to allow “flexible” underwriters to sell the deal, followed by an additional 3 cents in fees.

Ultimately, once a deal falls below about 95 cents on the dollar, the losses pile up for the banks.

Estimates of losses on the Intertape deal are around $50 million for Deutsche Bank, Bank of Montreal, Credit Suisse, Golub Capital and Jefferies, according to people familiar with the deal. Deutsche Bank declined to comment.

Such deep discounts in the corporate bond market are rare. According to financial data provider LCD, only five other deals since the 2008 financial crisis have closed at or below Intertape’s 82-cent price level.

A second deal last week for U.S. chip materials maker Entegris, underwritten in late 2021 by a banking group led by Morgan Stanley, was also struck at a discount, just under 91 cents on the dollar.

The $895 million bond was issued at the highest possible agreed coupon or interest rate of 5.95%, according to people familiar with the deal. The price rebate pushed the bond’s overall yield to 7.5%. Losses for the banks – including Barclays, Bank of America, PNC, Truist and Wells Fargo as well as Morgan Stanley – amounted to around $35 million, the people say.

Underwriters declined to comment.

Bankers said they had already changed their approach to underwriting new deals, creating a bigger cushion so they could sell bonds at a discount in the future while still collecting their fees. But it will take a few more months for old trades to find their way into the market, they said. Losses should be painful, but manageable.

Bankers also said companies exposed to a downturn in the economic cycle have been hit particularly hard in the bond market, with the Intertape deal seen as an example.

In the coming weeks, one of the deals bond investors and bankers are watching closely is the takeover of cloud computing group Citrix. Elliott and Vista Equity Partners agreed in January to take the company private for $16.5 billion, in order to merge it with Vista-owned Tibco. With debt sales led by Bank of America, the acquisition is expected to require billions of dollars in funding from the debt markets.

Bankers are already hinting that some creativity may be needed to push through the deal, once regulatory approvals are finalized. “It’s going to be a challenge in this environment,” said a banker familiar with the matter.


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