Unwanted Leveraged Loans Get Relationship Banking Makeover

(Bloomberg) -- As leveraged loans continue to pile up on the books of arranging banks in the U.S. and Europe, they’re finding a novel way to ease the pain.

Arrangers of recent deals for Kantar Group Ltd and CRH Europe Distribution could have been left with costly term loans on their hands when money managers snubbed the credits for posing too many risks.

But instead of holding the unsold portions on their trading books, the arrangers recut the debt as shorter-dated, amortizing facilities — known as a term loan A. These were then booked as a long-term asset or sold to other relationship banks that have ties with the company or the private equity firm behind the buyout, according to people familiar with the matter.

While this strategy may be proving a cost-effective exercise to get struggling loans tucked way, it also highlights how fund managers are increasingly worried about lending to companies they see as over-indebted or where terms have been stretched too far.

Read More: Blackstone Leans on Allies to Help Raise CRH Unit Buyout Loan

Sponsor Permission

It also shows private equity firms allowing arranging banks to make changes to the financing that go beyond the agreed package of debt terms.

Financial sponsors can be co-operative, within limits, when deals prove more difficult to sell than expected, said a banker who asked not to be identified.

If, as with Kantar and CRH Distribution, the sponsor does allow a change in structure, relationship banks can book the amortizing TLA for their own investment purposes on a different part of the balance sheet and — unlike on a hung loan position — they don’t have to mark the position to market.

Kantar was bought out by Bain Capital LP and CRH Distribution by Blackstone Group Inc.

Less Pressure

Banks holding this excess debt say they’re not under pressure to offload the paper whereas they typically want to get rid of unsold deals as fast as possible. Being left long the debt may restrict them from underwriting future deals at a time when securing financing commitments for leveraged buyouts is coming under greater scrutiny.

Some may want to shift the risk eventually though, and one solution is to wait until momentum around the company improves and then raise additional from debt fund managers to replace the TLA.

The TLA carve-out isn’t being applied as a cure for all struggling loans, however, and some unsold deals continue to hang over the market.

When banks were unable to find enough buyers for the loan backing Advent International Plc’s purchase of the a unit of Evonik Industries AG earlier this year, the underwriting banks were left holding about half of the debt.

To manage this long position, they agreed among themselves not to sell the residual paper at less than 95% of face value for six months. The lock-up ends next month, at which point they will be free to sell at any price.

--With assistance from Sarah Husband.

To contact the reporters on this story: Ruth McGavin in London at rmcgavin1@bloomberg.net;Laura Benitez in London at lbenitez1@bloomberg.net

To contact the editors responsible for this story: Vivianne Rodrigues at vrodrigues3@bloomberg.net, Charles Daly

©2019 Bloomberg L.P.