MUFG Beats Credit Suisse to $500 Million Deal Only to Stumble

(Bloomberg) -- Mitsubishi UFJ Financial Group Inc. has been on an expansion kick in the debt market. But its first attempt as a sole underwriter on a dollar high-yield bond sale didn’t go so well.

The bank’s securities unit bought $500 million of bonds directly from oil and gas exploration firm CNX Resources Corp., with plans to parcel them off to investors later.

Its decision to essentially guarantee the deal’s price allowed it to beat out Credit Suisse Group AG, which had already started gauging investor interest in the company, people familiar with the matter said. MUFG bought the bonds at a more aggressive level than what Credit Suisse was proposing to win the deal, after CNX Resources sought better terms from other banks.

But appetite among investors was lukewarm. MUFG ended up selling some at a discounted 97 cents to get them off its books, while also holding on to a portion, said the people, asking not to be identified discussing a private matter. That equates to about $15 million in losses for the bank that could increase. Some of the losses are unrealized and could yet be reversed.

Representatives for MUFG and Credit Suisse declined to comment, as did a representative for Canonsburg, Pennsylvania-based CNX Resources.

Tenuous market

The deal was the bank’s first as a lead and sole bookrunner on a U.S. junk bond, according to data compiled by Bloomberg going back to at least 2005, as it seeks to expand its debt offerings in the region. The transaction comes as the high-yield bond market remains tenuous for borrowers after volatility stymied sales late last year, and perhaps more so for firms with fortunes linked to oil and gas prices. CNX Resources tried to sell bonds in March 2018 but was one of a few energy firms to pull deals that month as investors grew wary of risk.

MUFG bought the bonds that mature in 2027 from CNX Resources at a price that yields 7.25 percent, before selling a portion to investors at a higher yield of 7.75 percent. CNX Resources will use proceeds to buy up to $400 million of its outstanding 5.875 percent senior bonds due 2022 and repay other debt, it said in a statement on March 1.

MUFG, which owns almost a quarter of Morgan Stanley, has been expanding lending and underwriting in the U.S and added teams for trading mortgage-backed securities and arranging non-investment grade debt in 2016. Revenue from its U.S. operations has been steadily rising to account for 19 percent of sales and other operating income as of March 31 last year, data compiled by Bloomberg show.

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