Wall Street banks are offloading leveraged loans at discounted prices and demanding that borrowers accept less advantageous terms, as they move to protect themselves from rapidly weakening demand in a previously hot corner of the credit market.

The development reflects mounting concern from investors about the quality of loans used to finance private equity buyouts, following a series of warnings from central bankers this year.

Bank of America, Deutsche Bank, Macquarie, Credit Suisse and Barclays lobbied for greater leeway when they agreed to finance the $4.4bn takeover of travel technology group Travelport by Siris Capital and an affiliate of Elliott Management earlier this week, according to people with knowledge of the transaction.

The terms ultimately agreed give the banks the ability to increase the interest rate on the loan and tighten covenants, if needed to attract investors.

Banks can end up facing losses if they cannot sell the loans on the terms they have promised to borrowers.

While some flexibility is standard in most deals, bankers and lawyers say that the amount by which the banks can lift the interest rate on the yet-to-be-issued Travelport debt is greater than would have been agreed months earlier, when investors were flocking to the $1.3tn leveraged loan market.

Banks have been stirred into action by a rapidly weakening leveraged loan market, as would-be buyers of the loans shift to the sidelines. According to an S&P/LSTA index, existing loans are selling at less than 96 cents on the dollar, compared with 98 cents just a month ago.

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Several recently issued loans, including debt syndicated by Goldman Sachs and JPMorgan to finance private equity buyouts, have been offered to investors with substantial discounts.

Banks that commit to arrange financing for highly leveraged transactions promise companies a particular interest rate, with some leeway to adjust that rate higher based on investor demand for the syndicated loan, up to a cap. That leeway is known as “flex”.

One banker estimated that the caps, which earlier this year ranged from 125 to 150 basis points above the agreed interest rate, had risen to 200 basis points in recent deals.

A second dealmaker added that higher caps had become necessary because investors were demanding higher interest payments or steeper discounts to agree to a deal — to the point that banks were saying: “Just let us know what changes you need us to make in order to get there.”

“There’s a lot more market volatility now, so we have seen some banks take more flex today than they were [using] about three or four months ago,” said Steven Messina, a partner at law firm Skadden Arps. “Banks losing money on these deals doesn’t happen too often these days, but in downturns, circumstances could change.”

A growing chorus of central bank governors, credit rating agencies and investors have warned of the risks in the leveraged loan market, which has ballooned in size over the past two years. Federal Reserve governor Lael Brainard raised concerns last week, saying that leveraged loan risk-management practices at banks may have “weakened”. The International Monetary Fund and former Fed chair Janet Yellen have also argued standards are deteriorating.

Banks’ demands for greater flexibility and investors demands for higher interest rates or steeper discounts are tightening financial conditions for borrowers, making leveraged buyouts more expensive for private equity buyers.

“Banks are asking for much more pricing flexibility for both [interest] rate and discount, and correspondingly some of the more aggressive terms people were looking for when the market was frothier earlier in the year might be dead on arrival,” said Scott Selinger, a partner at Debevoise & Plimpton.

JPMorgan unloaded a loan backing the takeover of private jet provider XOJET at 93 cents on the dollar earlier this month, according to one person with knowledge of the deal. Investors refused to bite when JPMorgan first started marketing the deal at 99.5 cents on the dollar with a yield 4.75 percentage points above Libor. To entice bidders, the company also had to pony up higher interest rate payments.

A Goldman-led loan that funded the private equity buyout of touchscreen maker Elo Touch was also sold at a discount this month, the person added.

“Every deal in the market at the moment is getting flexed,” said Grant Moyer, the head of leveraged capital markets at MUFG Securities. “Of the many deals that are pricing this week and next, we’re going to see every single one of them widen out.”

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Leveraged buyout activity in the US has surged to its highest level since the financial crisis, according to data provider Dealogic. Globally, nearly $307bn of private equity-baked takeovers have been clinched this year. More are in the works, including potential private equity takeovers of aluminium group Arconic, television ratings company Nielsen, and cyber-security software maker Symantec, each of which could top $10bn in size.

Dealmakers are now closely watching the performance of recently announced leveraged buyouts such as Brookfield’s $13.2bn buyout of Johnson Controls’ power business. Many of these deals have months before they are expected to close, giving banks time to wait out the market volatility and try to drum up investor interest in the financing packages.

Travelport, Elliott and Siris declined to comment. Bank of America, Barclays, Credit Suisse, Deutsche Bank, Goldman Sachs and JPMorgan also declined to comment. Macquarie did not respond to request for comment.

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