Bank of America, Barclays, and other major banks that held billions of dollars of leveraged loans in 2022 are opting out of leading financing for riskier buyouts this year. They are concerned about the loans becoming stuck on their balance sheets, according to bankers and buyout executives interviewed by the Financial Times. Last year, some of these banks faced difficulties finding investors for debt linked to Elon Musk’s purchase of Twitter and other deals involving companies like Citrix, Nielsen, and Tenneco.
The hesitancy among banks is driven by a fear that deals currently available could meet similar fate, says Gerard Cassidy, head of US bank equity strategy at RBC Capital Markets. He suggests that banks may choose to hold back on loans during certain times. “This could be one of those times,” he stated.
Bank of America has witnessed a decline in its ranking in LBO loan and high-yield bond underwriting league tables. Last year, it was sixth, and in 2021 it was fourth, but it has now dropped to 22nd. The bank has only worked on eight buyout financings this year, a significant decrease from 2022 (28 financings) and 2021 (71 financings), according to Dealogic data. Barclays has also slipped from third to fifteenth place in the past year, as per the Dealogic data.
The decrease in rankings for several banks reflects not only the scarcity of buyouts this year but also their reluctance to lend stemming from uncertainty surrounding the economic conditions. Furthermore, banks are steering clear of deals that could receive low ratings from credit rating agencies, as that may impact demand from potential loan buyers.
As a result, more loans are being directly arranged by private credit funds, bypassing the banks. In the current market environment, where opportunities are limited due to the lack of volume, private equity firms face a reduced pool of potential lenders for large-scale takeovers. This situation has led some buyers to resort to more expensive debt provided by private credit funds such as Blackstone, Sixth Street, and Blue Owl.
For banks like Bank of America, being on the sidelines means missing out on lucrative origination fees and secondary trading opportunities following deals. This trend has not gone unnoticed by executives at private equity firms who have noticed the absence of banks like BofA on lending to new deals. Traditional banks are being cautious about extending long-term bridge financing without flexibility in changing terms if market conditions shift drastically, as they did in 2021 and 2022 when the Federal Reserve signaled aggressive rate hikes. Banks like BofA, Barclays, Citigroup, and Morgan Stanley faced losses when the bonds and loans they had committed to finance plummeted in value.
While it is unclear whether banks have lost their appetite for financing risky debt or have simply opted out of the few deals that have occurred this year, Bank of America remains the top underwriter of leveraged loans in the US, including loans to below investment-grade companies, according to Refinitiv data. However, bankers suggest that BofA has focused more on broader leveraged finance activities than on LBO loans this year. The reluctance to lend is also due to concerns about uncertainty in the economic outlook.
Notably, banks like BofA, Barclays, and Morgan Stanley are still holding debt tied to certain transactions, including Elon Musk’s takeover of Twitter and Apollo’s purchase of Brightspeed.
Competition for new deals is slowly increasing, and bankers are closely monitoring the lending commitments of their competitors. The absence of certain banks, like BofA, Citi, and Barclays, is being noticed in recent financing deals for acquisitions by companies like KKR and GTCR.
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