London: The high-yield, high-risk finance market is unlikely to recover until June at the earliest as banks clear a backlog of unsold debt used to finance buyouts, according to Standard & Poor’s.
More losses: A file photo of former Merrill Lynch CEO Stan O'Neal. Widening losses triggered by the worst US housing slump in 16 years prompted the brokerage to oust O’Neal as chief executive last week.
“Leveraged finance was a powerful contributor to revenue growth at the major commercial and investment banks prior to the third quarter of 2007, but future prospects look bleak,” S&P analysts led by Richard Barnes in London wrote in a report published Monday.
Banks are holding about $171 billion (Rs6.74 trillion) of high-yield debt they planned to sell, according to data compiled by S&P’s LCD. A “significant decline” in debt financing business will push banks to cut jobs and employee bonuses, S&P said.
Widening losses triggered by the worst US housing slump in 16 years prompted Merrill Lynch & Co., Inc. to oust Stan O’Neal as chief executive officer last week.
New York-based Citigroup Inc. on Sunday accepted the resignation of chief executive Charles O. “Chuck” Prince III and appointed Robert E. Rubin, the former US treasury secretary, as chairman, and Winfried Bischoff, chairman of its European operations, as its acting CEO.
Citigroup shares dropped to the lowest since 2003 last week. New York-based Merrill Lynch had its biggest weekly decline in six years after Deutsche Bank AG said the world’s largest brokerage may report more losses.
Europe’s benchmark leveraged loan index, the iTraxx LevX Senior, fell to 97.875 on 2 November from a three-month high of 99.625 on 15 October, according to Frankfurt-based Deutsche Bank.
In leveraged buyouts (LBO), firms put up a little of their own money and borrow the rest, piling debt on to the company being acquired. Banks underwriting the financing for LBOs commit to raise the money and earn fees to compensate for the risk of taking on any debt they can’t sell to investors. Leveraged or high-yield loans are rated below Baa3 by Moody’s Investors Service and BBB- by S&P.
Banks reduced their backlog of leveraged loans from as much as $350 billion in the past four months, according to S&P. Lenders to New York-based Kohlberg Kravis Roberts & Co. (KKR) and TPG Inc. in Forth Worth, Texas, sold $7 billion of loans last month to help finance the buyout of Energy Future Holdings Corp., the power producer formerly known as TXU Corp.
By contrast, banks underwriting KKR’s acquisition of UK drugstore chain Alliance Boots, Europe’s biggest-ever buyout, have only managed to sell £750 million (Rs6,135 crore) of the highest-yielding mezzanine debt since July, a fraction of the £9 billion banks have to syndicate.
“Liquidity has gradually returned to the leveraged finance market since September, particularly in the US,” the S&P report said. “The European market has been slower to recover, but the backlog is now starting to move.” Sales of collateralized loan obligations (CLO), securities that pool leveraged loans, are also picking up, the report said. CLOs are divided into different portions of varying risk, and can offer higher returns than the debt they are based on. “The CLO market is gradually unfreezing,” the analysts wrote.