Wall Street Leveraged Debt Desks Set to Dial Up Risk in New Year
Wall Street Leveraged Debt Desks Set to Dial Up Risk in New Year
(Bloomberg) -- Bankers in the $2.5 trillion leveraged credit market are ready to get back to risk taking.
After a volatile year that saw over $2 billion of loans pile onto their balance sheets as investors sought safer assets, underwriters are getting ready for another wave of risky sales in 2020. This time, they’re betting investors will be more receptive.
Banks have high hopes that they’ll be able to place debt sales backing several leveraged buyouts and continue to chip away at a backlog of unsold loans come January. Investors favored safer junk bonds rated in the BB range for much of 2019, but their turn in sentiment has helped notes with ratings in the near-bottom CCC range outperform in December.
“There has been a view that rates are going to stay low for long so you can hide out in BBs,” said Marc Warm, co-head of U.S. leveraged finance capital markets at Credit Suisse Group AG, who argues strong economic data should encourage more risk taking. “People will loosen up a little bit.”
LBO Supply
A first test of market appetite for buyout debt could come from a $1.4 billion offering of loans and bonds for BC Partners’ buyout of Presidio Inc. Underwriters already took the debt on their books to allow the acquisition to close as planned this month, but may start syndicating to investors in January, Bloomberg previously reported.
Also on the calendar for early 2020 is a multibillion-dollar offering of loans and bonds to help finance Digital Colony Partners and EQT Partners’ take-private of Zayo Group Holdings Inc. The deal is one of the largest to emerge in the leveraged finance market since a $10 billion sale for the buyout of Johnson Controls International Plc’s car-battery unit in March.
Private equity firms are also expected to bring a steady flow of new deals that need debt funding, according to Warm.
“Corporate boards will be trigger-shy when they are staring at election year,” Warm said. “But sponsors are doing deals because they have raised funds to do so.”
These deals are expected to come to market after investors spent much of the second half of 2019 shunning riskier transactions amid fears over the trajectory of the U.S. economy. The flight to safety sent BB rated junk bonds to their tightest spread relative to Treasuries since the financial crisis. With little room for risk premiums to compress further, being overexposed to safer credits could be a recipe for underperformance in 2020, some credit analysts warn.
“There has been a land grab for risk over the past several weeks,” said Peter Schwab, a portfolio manager at Impax Asset Management LLC. “I am optimistic about the economy, but not thrilled about valuations.”
Hung Loans
There are other signs that investors are getting more comfortable loading up on risk. Triple C bonds, the most speculative tier of high-yield debt, have surged 4.5% in December, outperforming the broader high-yield market for the period. As the pool of hungry buyers grows, banks have been able to offload at least some of the risky loans they were forced to take on their books when the market turned cautious.
Lenders that arranged the financing for Advent International’s buyout of Evonik Industries AG’s plastics division, for example, have managed to trim their exposure after being left with around half of the debt on their books in the summer.
“There are some painful toe stubs still on bank balance sheets, but people seem relatively relaxed about the risk because it’s generally been a very strong year for leveraged finance,” said Jason Dillow, chief executive officer of credit hedge fund Bardin Hill Investment Partners.
--With assistance from Sarah Husband.
To contact the reporter on this story: Davide Scigliuzzo in New York at dscigliuzzo2@bloomberg.net
To contact the editors responsible for this story: Natalie Harrison at nharrison73@bloomberg.net, Claire Boston, Boris Korby
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