U.S. one dollar bills are arranged for a photograph to illustrate the theme of risk in Oradell, New Jersey, U.S. (Photographer: Ron Antonelli/Bloomberg)

Priced to Sell: Banks Dangle Hung Loan Deals at Steep Discounts

(Bloomberg) -- The market for riskier debt has been inching back after December’s seizure -- but not enough to help banks offload two of the toughest leveraged-loan deals without steep discounts.

Wells Fargo & Co. and Barclays Plc have been sounding out investor interest for a loan they got stuck with in Blackstone Group LP’s buyout of Ulterra Drilling Technologies. The banks looked to sell the riskiest piece of debt at a price close to 90 cents on the dollar or lower, people with knowledge of the matter said.

Lenders led by Deutsche Bank AG and UBS Group AG are also considering heavy discounts to sell hung loans for CVC Capital Partners’s takeover of ConvergeOne, said the people, asking not to be identified because the discussions are private. The banks have been stuck with the $1.2 billion of debt for the deal since late last year when global volatility and fears of an oil glut made investors recoil from risk.

The lingering deals are emblematic of a loan market that hasn’t quite reclaimed its luster. The outlook for riskier debt has improved amid a more dovish tone from the Federal Reserve, higher-than-expected job gains and optimism over U.S.-China trade talks. But the shine that comes from investing in floating rate debt has also dulled with the Fed signaling it may slow the pace of interest rate increases.

Fraud, Fluctuations

Loans that may have sold without concessions during last year’s peak are facing pushback as investors are wary of offerings with an added layer of complexity: ConvergeOne’s loan sale was recently hindered by a case of employee fraud, while Ulterra, a manufacturer of equipment for the oil and gas industries, is exposed to fluctuations in commodity prices.

Representatives for CVC, Blackstone and the four banks leading Ulterra and ConvergeOne’s deals declined to comment.

Ulterra and ConvergeOne make up about half of the $3.6 billion of unsold debt banks funded at the end of last year. When investor appetite soured, the lenders were forced to take the loans on their balance sheets to allow pending acquisitions to close as planned. Those unsold loans, or hung deals, are a rare occurrence in the leveraged finance market, as banks typically offload debt they agree to underwrite before they need to deliver the cash to their clients.

Priced to Sell: Banks Dangle Hung Loan Deals at Steep Discounts

The deal for ConvergeOne, an IT services provider which CVC acquired last month, faced the roadblock of an $11 million employee fraud related to inventory. Accounting firm KPMG, which was hired to conduct an independent investigation, is expected to conclude its review by the end of next week, one of the people said. A spokesman for KPMG declined to comment.

The banks have already received enough orders to cover the riskiest portion of the ConvergeOne debt sale -- a $275 million second-lien loan that is being privately placed -- at prices of 93 cents on the dollar or above, according to the person with knowledge of the matter.

Deutsche Bank, which is leading the $960 million first-lien loan that is also part of the offering, is expected to relaunch that tranche at a price of 95 to 96 cents on the dollar once the review is completed, the person said.

Wells Fargo and Barclays had to fund the $415 million loan for Blackstone’s buyout of Ulterra from affiliates of private equity firm American Securities LLC themselves. They had also been unable to offload the loan to investors ahead of the acquisition’s closing by the end of 2018.

Discounted Deals

The two loan deals are not the only ones to require discounts to clear the market, even as issuance of risky credit has resumed amid the market rebound. Banks arranging loans for C&D Technologies’s purchase of Trojan Battery struggled to sell the debt ahead of the deal’s closing.

Bank of America, the lead arranger, sold its portion of that loan at about 89 cents on the dollar earlier in January, while the other banks in the group which included Credit Suisse Group AG and ING Groep NV opted to keep their pieces of the debt at that time. Now Credit Suisse has started to sell pieces of its portion, at prices in the low 90s, the people familiar with the matter said.

The three banks either declined to comment or didn’t have immediate comment. A representative for C&D declined to comment.

Borrowers have been gradually coming back to the leveraged loan market with some tussle over prices and terms, and prices, with some deals selling at around 98 cents on the dollar. Dun & Bradstreet Corp. completed a $2.53 billion loan sale -- a smaller amount than it initially sought -- after shifting some of the debt into bonds. It sold the loan after widening the price and improving terms, including limiting the amount of so-called addbacks, or adjustments to an earnings calculation, according to one of the people.

A representative for Dun & Bradstreet new private equity owners didn’t provide comment.

In the meantime, caution continues to permeate the market. Funds that invest in U.S. leveraged loans pulled money out for the eleventh week in the five trading days ended Jan. 30.

©2019 Bloomberg L.P.