Leveraged-Debt Machine Is Failing

Leveraged-Debt Machine Is Failing

As the cheap-money era comes to an end, some of the biggest banks in the world are being forced into major writedowns on the merger and acquisition deals they did during that decade-long boom, reports an article in Bloomberg. Layoffs and spending cuts are expected across the board, with few firms being spared, though Bank of America, Barclays, and Morgan Stanley are some of the most exposed with roughly $40 billion in leveraged loans on their balance sheets.

Risky corporate loans with overly generous terms were being handed out well into last year. As the Fed aggressively tightened its monetary policy, the M&A boom came to an abrupt end—and so did the flow of risky loans. Though losses aren’t anywhere near what was seen during the 2008 global financial crisis, Bloomberg predicts “an industry-wide reckoning” with the “underwater deals” that so many investment banks and firms have made. Recent M&A deals have had much more conservative terms—a trend that is expected to continue. Big lenders now have their capital tied up in debt, and leveraged-finance bankers could see layoffs as well as a significant reduction in bonuses this year, the article contends.

Elon Musk’s Twitter takeover is the biggest single deal weighing down balance sheets, with $12.5 billion in leveraged loans and bonds. Seven lenders ponied up the cash last spring, but by November, the company’s cash had declined so fast that other funds were making offers to buy the loans for as cheap as 60 cents on the dollar. While the lenders didn’t take those offers, their losses are estimated to be about $4 billion, with Morgan Stanley taking on about $1 billion after putting up the most cash.

Meanwhile, the long-term relationship between Wall Street and private equity firms could erode, with banks who are still lending doing so at less-than-appealing terms, and investment bankers missing out on substantial fees as leveraged loans and junk bonds remain unpopular. Finalizing new deals has become much slower, which could lead to lower returns for private-equity firms. And banks are protecting themselves more by working in flexibility to alter the price at which debt can be sold off. Some banks have been able to offload some of their debt; in one example, a group of lenders led by Bank of America dumped $359 million in loans for Nielsen Holdings at the end of last year, and more sales are likely on the horizon. But in the meantime, as the Fed’s tightened policies continue to clog up the LBO pipeline, it could take months to get it moving again.


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