Bank of America-Led Group Faces Loss on Pumpmaker SPX Junk Bond
Bank of America-Led Group Faces Loss on Pumpmaker SPX Junk Bond
(Bloomberg) -- A group of banks led by Bank of America Corp. is at risk of losing money on a junk-bond sale for pumpmaker SPX Flow Inc. after offering a steep discount on the deal to lure investors who are fleeing riskier assets.
The $570 million unsecured bond is being discussed at a discounted price of 91 cents on the dollar, which would bring the all-in yield on the debt to a range of 10.25% to 10.5%, according to people with knowledge of the matter.
That new yield exceeds the 8.75% maximum interest rate that the banks had agreed to sell the bond at when they originally provided the commitment to fund the buyout of SPX Flow by private equity firm Lone Star Funds, said the people, who asked not to be identified discussing a private transaction.
The banks had syndicated a portion of the risk to investors before officially launching the bond deal on March 7, but they still stand to lose money on the debt they weren’t able to offload, one of the people added.
Banks typically earn fees equal to about 2% to 2.5% payment of an entire debt sale. Assuming a fee of 2.5%, and that banks have no further cushion to absorb losses when bonds are sold below face value, losses would amount to about $37 million on a $570 million junk bond, according to Bloomberg calculations.
Representatives for Bank of America Corp., which is leading the bond, and Citigroup Inc., which is leading a loan that’s part of the financing, declined to comment. Representatives for BNP Paribas SA, Deutsche Bank AG, Royal Bank of Canada, Truist Financial Corp and UBS Group AG, who are also bookrunners on the bond, declined to comment.
Representatives for SPX Flow and Lone Star Funds didn’t respond to requests for comment.
Tough Market
The bond, rated Caa2 by Moody’s Investors Service, or eight notches below investment grade, is one part of the financing that also includes a $1.54 billion leveraged loan.
The banks may also sell the loans at an even lower price than they previously thought: 96 cents on the dollar, down from 98 to 98.5 that was first offered, according to different people with knowledge of the matter. Pricing guidance of 450 basis points over the Secured Overnight Financing Rate and a floor of 50 basis points remain the same, but could also change, the people added.
Financings for leveraged buyouts were mostly clearing the market without a struggle just a few weeks ago when demand for floating-rate debt, whose interest payments rise when rates increase, was sky high. That interest has cooled amid a broader sell-off in risk assets following Russia’s invasion of Ukraine and worsening inflation.
Sales of collateralized loan obligations, the biggest buyers of loans, has also slowed, while other funds that buy loans are seeing outflows for the first time in three months -- further weakening demand.
Average loan prices, which were trading at post financial-crisis highs above 99 cents on the dollar in January, dropped to below 96 cents earlier this week. The turmoil has led several other borrowers, including Avis Budget Group, to offer bigger discounts than usual on new offerings to get them over the line.
Some banks have opted to put loan sales on hold. A group led by Royal Bank of Canada pulled a deal for SS&C Technologies Holdings Inc. on Wednesday, before official marketing even got underway. They’re now stuck with $1.7 billion of debt.
SPX Flow’s debt sale is rated much lower than that of SS&C Technologies. The yield being offered on the SPX Flow junk bond is also higher than the average 9.33% yield on CCC tier debt, the riskiest above default.
S&P Global Ratings, which grades the bonds at CCC+, said the acquisition would significantly increase the company’s debt burden in a March 8 report.
The bond’s unusually long two-week marketing period is due to wrap up Thursday, while commitments on the loan were due at 12 p.m. in New York today.
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