US LevFin wrap — Bankers say ‘nope’ to syndications, place hope in direct lending

William Hoffman

21 July 2022•4 min read

Opening in theaters this weekend is Jordan Peele’s latest horror film “Nope,” which is exactly what leveraged finance bankers said this week when surveying the new-issue market.

The Bank of America-led syndicate providing Citrix’s buyout debt had been testing the waters for a window to offload the $15bn package. Ultimately however, they looked at rising inflation, next week’s Fed meeting and upcoming summer vacations, and held back.

The underwriters for Apollo’s buyout of auto parts maker Tenneco made a similar decision. The group, led by Citi and BofA, are reported to be delaying syndication of the $5.4bn financing until after Labor Day.

After all, banks have been sitting on these underwrites for months already, and the losses they are facing are already huge. What’s a few more weeks?

“It’s a little bit of a gamble, saying let’s wait until we can get better execution in September,” said a portfolio manager. “But clearly the bankers are looking at that deal and thinking…and it can’t get much worse than this, so let’s just wait.”

The primary market wasn’t completely dead this week, but the struggles other deals encountered give a sense of the pain Citrix and Tenneco’s bankers are looking to minimize.

A syndicate led by Deutsche Bank and UBS placed $1.47bn of debt this week to fund CD&R’s takeover of Cornerstone Building Brands.

The loan portion was downsized in favor of a larger bond tranche, and the borrower was forced to make several covenant revisions. But that is a small sacrifice compared to the $200m loss the underwriters took to offload the debt (full story here, from Bloomberg).

The $710m SSNs came at 90.3 for an 11% all-in yield, while the $300m TLB priced with a spread of SOFR+562.5 and was placed at 90.5, down from initial talk of 93.

With CLO formation still stagnant, more issuers could echo this strategy of shifting funds from loans to bonds — the opposite of what they were doing earlier this year.

“For larger transactions out there or in the pipeline, it becomes a capacity issue and right now you’re not seeing demand from loan fund investors so they have to tap just about every market they can,” said Jeffrey Bakalar, head of leveraged credit at Voya Investment Management.

Some deals actually got tighter OIDs this week, however. Credit Suisse managed to place a term loan for Hispanic Food, an Apollo-backed specialty supermarket group with a decidedly regional footprint, at an OID of 94 from initial talk of 92.

Burning bridges

In this market, placing a deal at 94 rather than 92 is a small victory. Banks have been burned by bridge debt this year, so it’s no surprise that they are changing their underwriting behavior.

Over in Europe, bankers are telling our 9fin colleagues that high-growth businesses are out of fashion, unless they’re in well-tested areas like healthcare and software. Stable, cash-flowing companies with reliable end markets are the order of the day (read our full story here).

In some ways, that’s little surprise — risk-takers tend to retreat when taking risks becomes too costly, and cashflow is king when the economy falters.

But the wrinkle here is that the market has changed a lot over recent years, and banks are going to face a lot more competition when chasing such credits.

Direct lenders are flush with cash and ready to deploy it. So much so that some pundits are suggesting they may over-extend themselves.

After being meaningfully tighter than the banks for a long time, even private credit pricing is starting to rise. The giant funds are also paring back on the risk they are taking to reflect the more uncertain outlook for credit.

This will inevitably impact the trade-off between syndicated and direct debt, but for now, direct lenders can still offer a smoother path for sponsors to close deals.

Some of the banks are fighting back, though. As syndicated markets wither, JPMorgan has created a new direct lending strategy and is now making loans directly off its own balance sheet (full story here, from the FT).

It’s hard to tell how similar this is to Barclays’ plans in the space (the wording of Bloomberg’s article from earlier this year is light on detail) but it seems clear that mentalities are shifting. Banks might be saying “nope” to syndications, but there may be hope for direct lending.

On a final note, despite the weakness in primary there is plenty going on behind the scenes in corporate debt. In this week’s episode of our Cloud 9fin podcast, Goodwin Procter partner Kris Ring reveals that borrowers are hard at work upsizing revolvers and delayed draw loans.