# U.S., European banks could lose over $5 billion from risky buyout loans
Author:  Pal Sinha, Barnali 
Author URL: https://financedigest.com/author/pal-sinha-barnali
Published: 2022-08-18
Category: NEWS
Category URL: https://financedigest.com/category/news
Meta Title: Top U.S. and European Banks Face Tough Times on Leveraged
Meta Description: Banks face $5-$10 billion losses on leveraged loans due to rising rates and market slowdown, impacting big lenders like Bank of America and Deutsche Bank.
URL: https://financedigest.com/u-s-european-banks-could-lose-over-5-billion-from-risky-buyout-loanshtml

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By Saeed Azhar, Anirban Sen and Davide Barbuscia

NEW YORK (Reuters) -Top U.S. and [European banks](https://www.financedigest.com/dollar-outshines-euro-sterling-amid-european-bank-jitters.html "Dollar outshines euro, sterling amid European bank jitters") are facing tougher times in the riskiest parts of the loan market.

The biggest U.S. lenders, including Bank of America and Citigroup, wrote down $1 billion in the second quarter on leveraged and bridge [loans as rising interest rates made](https://www.financedigest.com/home-equity-made-simple-things-to-know-before-applying-for-loans.html "Home Equity Made Simple – Things to Know Before Applying for Loans") it tougher for banks to offload debt to investors and other lenders.

The pain has also spread across the Atlantic, after European lenders such as Deutsche [Bank and Credit Suisse reported](https://www.financedigest.com/how-banks-can-avoid-regulatory-reporting-mistakes-with-a-good-dose-of-automation.html "HOW BANKS CAN AVOID REGULATORY REPORTING MISTAKES WITH A GOOD DOSE OF AUTOMATION") losses for such exposure.

Large U.S. and European [banks are on track to lose $5 billion](https://www.financedigest.com/20-billion-in-bank-service-fees-are-you-overpaying.html " Billion in Bank Service Fees: Are You Overpaying?") to $10 billion more in coming quarters on leveraged loans they have committed to underwrite, according to bankers and analysts.

[Bank of America is among those most exposed to such writedowns because it is financing](https://www.financedigest.com/why-finance-professionals-must-bank-on-a-journey-to-the-cloud.html "Why finance professionals must bank on a journey to the cloud") at least three large buyout deals at a time when the LBO market has come to a standstill, bankers and analysts said. Bank of America declined to comment.

In the leveraged loan market, banks typically make higher-risk loans to [investors who want to purchase companies using the borrowed funds](https://www.financedigest.com/uk-investors-add-1-2-billion-to-equity-funds-in-march-calastone.html "UK investors add .2 billion to equity funds in March – Calastone"). As the market slowed, banks have responded with more stringent terms for new loans while struggling to distribute existing loans to other lenders and [institutional investors](https://www.financedigest.com/institutional-investors-back-shell-board-lawsuit-over-climate-risk.html "Institutional investors back Shell board lawsuit over climate risk"). Buyers are seeking more favorable terms.

If a [bank wants to push a deal](https://www.financedigest.com/seven-out-of-ten-uk-adults-aged-25-44-never-seek-advice-on-dealing-with-debts-despite-depending-on-the-bank-of-mum-and-dad.html "Seven out of ten UK adults aged 25-44 never seek advice on dealing with debts despite depending on the bank of mum and dad") on to the market to investors, they’re going to have to bring it at a discount,” said Dan DeYoung, high yield and leveraged loan portfolio manager at fund manager Columbia Threadneedle.

Goldman Sachs, Bank of America and Barclays are among the top three bookrunners for leverage buyout [financing for both leveraged loans](https://www.financedigest.com/1-in-3-uk-businesses-looking-for-finance-are-finding-it-harder-to-get-a-loan.html "1 in 3 UK businesses looking for finance are finding it harder to get a loan") and bonds since the fourth quarter of 2021 in the United States and Europe, according to data from Dealogic.

[Goldman Sachs](https://www.financedigest.com/telefonica-hires-goldman-sachs-to-sell-uk-mobile-masts-stake-el-confidencial-says.html "Telefonica hires Goldman Sachs to sell UK mobile masts stake, El Confidencial says") and Barclays declined to comment.

[Banks typically sell the loans rather than holding](https://www.financedigest.com/bank-of-canada-seen-on-hold-even-as-economy-accelerates.html "Bank of Canada seen on hold even as economy accelerates") them. They want to distribute about $80 billion to $100 billion of U.S. and [European leveraged loans to other lenders and investors](https://www.financedigest.com/analysis-european-retailers-are-on-investors-naughty-lists-this-christmas.html "Analysis-European retailers are on investors’ naughty lists this Christmas") in September and October, a delay in the process due to market disruption, according to three bankers involved in the market. If they are sold at a discount, the underwriters would have to swallow some losses, the bankers said.

The market was disrupted by the Federal Reserve’s plan to tighten monetary policy to [fight inflation](https://www.financedigest.com/inflation-fighting-central-bankers-air-climate-role-doubts.html "Inflation fighting central bankers air climate role doubts"), which sparked a sharp sell-off across fixed-income assets this year.

The [yield spread](https://www.financedigest.com/german-yields-steady-spreads-tighten-after-recent-repricing.html "German yields steady, spreads tighten after recent repricing") on the ICE BofA U.S. High Yield Index, a commonly used benchmark for the junk [bond market](https://www.financedigest.com/britains-bond-market-turmoil.html "Britain’s bond market turmoil"), rose to a two-year high of around 600 basis points in July. It has narrowed to 425 [basis points](https://www.financedigest.com/fed-officials-still-leaning-to-75-basis-point-rate-hike-in-july.html "Fed officials still leaning to 75-basis-point rate hike in July"), but is still up 120 bps since the beginning of the year.

We all underestimated how [big an issue inflation](https://www.financedigest.com/big-fall-in-euro-zone-inflation-offers-little-help-for-ecb.html "Big fall in euro zone inflation offers little help for ECB") was, and how aggressively the Fed was going to have to move,” said a senior loan banker in New York.

A number of the commitments that we wrote in the [fourth quarter](https://www.financedigest.com/german-gdp-contracted-by-0-4-in-the-fourth-quarter.html "German GDP contracted by 0.4% in the fourth quarter"), and in January and early February, were quickly underwater because the rates were so aggressive,” he said.

The bigger deals include [Bank of America-led financing for a $16.5 billion](https://www.financedigest.com/credit-suisse-54-billion-lifeline-offers-limited-respite-to-global-banks.html "Credit Suisse billion lifeline offers limited respite to global banks") buyout of software company Citrix Systems Inc by affiliates of Elliott Management and Vista Equity Partners. The lender is also financing Apollo’s [deal to buy](https://www.financedigest.com/endeavor-nears-deal-to-buy-vince-mcmahons-wwe-sources.html "Endeavor nears deal to buy Vince McMahon’s WWE -sources") Tenneco Inc which had an enterprise valuation of about $7.1 billion, including debt.

Bank of America is also among the [banks backing](https://www.financedigest.com/banking-turmoil-means-recession-fears-are-creeping-back.html "Banking turmoil means recession fears are creeping back") billionaire Elon Musk’s $44 billion acquisition of Twitter Inc, a deal put on hold after Musk backed out. Twitter has sued to force him to complete the transaction.

For some, the [market uncertainty merits a wait-and-see approach](https://www.financedigest.com/the-us-womens-lingerie-and-mens-underwear-market-to-be-driven-by-the-non-stoical-approach.html "The Us Womens Lingerie And Mens Underwear Market To Be Driven By The Non-Stoical Approach").

“The debt committed in the system needs to get placed and the equity investors … are being cautious, which is limiting LBO activity,” said Anu Aiyengar, global co-head of M&A at J.P. Morgan, referring to leveraged buyouts.

The price of existing loans on the S&P Leveraged Loan Index fell to a [two-year low](https://www.financedigest.com/stocks-hit-two-year-lows-sterling-comes-under-fire.html "Stocks hit two-year lows, sterling comes under fire") in July, according to Refinitiv data. While it has pared losses, the index’s decline this year reflects broader pressure on the debt [markets and rising concerns that the Fed’s](https://www.financedigest.com/markets-start-signalling-fed-may-be-going-too-far-amundi.html "Markets start signalling Fed may be going too far – Amundi") monetary tightening may pressure riskier borrowers. Two exchange-traded [funds that track leveraged loans](https://www.financedigest.com/the-professionals-at-real-estate-funding-solutions-helping-you-find-success-with-commercial-real-estate-loans.html "The Professionals At Real Estate Funding Solutions Helping You Find Success With Commercial Real Estate Loans"), the SPDR Blackstone Senior Loan ETF and the Invesco Senior Loan ETF, have dropped 4.9% and 3%, respectively, since the beginning of the year.

Both the availability and cost of debt financing for sponsors has become a challenge in some situations, particularly in the syndicated loan markets,” said Steve Arcano, a [global head of transactions practices for law firm](https://www.financedigest.com/sp-global-acquires-firm-to-bolster-capability-to-track-commodity-shipments.html "S&P Global acquires firm to bolster capability to track commodity shipments") Skadden, Arps, Slate, Meagher & Flom LLP, about the challenge faced by buyout firms.

The credit market is undergoing a wave of repricing after the Fed’s [rate hikes](https://www.financedigest.com/ecbs-villeroy-rate-hike-signals-strong-confidence-in-european-banks.html "ECB’s Villeroy: rate hike signals strong confidence in European banks"), according to Minesh Patel, a senior director at S&P Global Ratings.

“The real crux of the issue is that the markets have shifted,” Patel said. Borrowing rates are becoming more expensive for companies with [lower](https://www.financedigest.com/how-insurtech-is-helping-to-lower-car-insurance-rates.html "How InsurTech is Helping to Lower Car Insurance Rates") credit ratings, he said, citing an S&P study he co-authored.

Leveraged finance has been lucrative for large banks in recent years, so the expected losses will not be too alarming, said Marc Cooper, chief executive of Solomon Partners, a boutique [investment bank](https://www.financedigest.com/credit-agricole-launches-china-ma-and-investment-banking-business.html "Credit Agricole launches China M&A and investment banking business") in New York.

Large [banks are “going to get crushed” in the latest](https://www.financedigest.com/how-can-banks-defend-the-latest-generation-of-scam-victims.html "How can banks defend the latest generation of scam victims?") bout of volatility, but “they’re big boys,” he said. “They’ll take their writeoffs and move on.”

(Reporting by Saeed Azhar, Anirban Sen and Davide Barbuscia in New York; Additional reporting by Chibuike Oguh and Lananh Nguyen; Editing by Richard Chang)


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