Banks are already bracing for a September leveraged buyout boom

Banks are increasingly selling off short-term loans they made to fund leveraged buyouts, a sign that they’re freeing up capacity to lend even more in the coming months.

Lenders are distributing $7.8 billion of such loans for the leveraged buyout of Medline Industries Inc., the biggest since the global financial crisis. Wells Fargo is selling a $1.475 billion short-term facility to investors for Gray Television’s acquisition of Meredith Corp.’s broadcast stations. And Citigroup Inc. is syndicating a $400 million loan that is helping to finance Warburg Pincus’s acquisition of subprime auto lending company Exeter Finance.

“You’re going to see more of this activity so that the major banks can accommodate our sponsor and corporate clients’ deal flow,” said John McAuley, co-head of debt capital markets for North America at Citigroup Inc.

The high-yield bond market hasn’t seen this many sales of short-term bridge loans since before Covid-19 disrupted dealmaking, investors said.

The sales are also seen as a way for banks to reduce their risk as the delta variant spurs a resurgence in Covid-19 cases. U.S. stocks edged lower from all-time highs Monday morning in part because investors grew slightly more concerned about the spread of the virus.

But the main driver for bridge loan sales is the growing volume of leveraged buyouts and acquisitions, investors said. North American companies have been involved in $2.2 trillion of announced mergers and acquisitions this year, up 152% from the same period in 2020, according to data compiled by Bloomberg. It’s being driven by cheap borrowing costs and pent-up demand after a freeze in activity at the start of the pandemic.

“It’s going to be busy in September and October and probably November,” Citigroup’s McAuley said, referring to acquisition and buyout activity.

Acquisitions in the pipeline that will eventually need bond and loan financing include II-VI Inc.’s planned purchase of Coherent Inc., which has more than $5 billion in debt commitments from JPMorgan Chase & Co., and MKS Instruments Inc.’s expected acquisition of Atotech Ltd. for about $5.1 billion, for which JPMorgan and Barclays Plc provided financing.

Companies and private equity firms usually get bridge loans to seal the deal on a leveraged buyout or a strategic acquisition. Banks often hold onto those commitments until the borrower can refinance them into longer-term debts in the syndicated leveraged loan and high-yield bond markets.

But in recent weeks, some banks have been selling to investors the portion of the financing that will eventually be replaced by high-yield bonds.

Investors that buy bridge loans receive a modest fee and also an early look at a company’s financial information. Plus they are expected to receive more favorable allocations in the eventual bond deal, which is especially valuable in a market where investors are fighting to get in on new issuance that is often oversubscribed.

For companies, it’s a guarantee that at least the unsecured bond portion of the transaction has already been placed with investors, which can help the full deal go smoothly when it’s eventually launched to the whole market.

U.S.

Pfizer Inc. launched a sustainability bond to help fund Covid-19 vaccine expenses, and was among four investment-grade issuers Monday morning. About $10 billion to $15 billion of supply is expected this week, likely centered around Monday and Tuesday before the market goes quiet until after the Labor Day weekend.

• At least four junk bonds launched, including US Acute Care Solutions’ $125 million tap to help fund a dividend, which brought the total to around six in the market on Monday
• Investor outreach for PSSI’s $165 million acquisition loan funding its purchase of Safe Foods is the only meeting scheduled for Monday in leveraged loans. No new deals were announced
• U.S. credit ratings improved last week as the main ratings companies issued 30 upgrades and 18 downgrades
• For deal updates, click here for the New Issue Monitor
• For more, click here for the Credit Daybook America

Europe

Only one deal came to the European high-grade market on Monday, namely the African Development Bank tapping its sterling notes due in 2026.

• Berlin Hyp AG has mandated Commerzbank, DekaBank, HSBC, UBS and UniCredit to lead manage its forthcoming 500 million euro ($589.35 million) mortgage covered five-year bond.
• Austrian lender Bawag is set to become the latest addition to the world of sustainable finance.

Asia

Asia’s primary dollar-bond market was off to a muted start on Monday, as China’s widening regulatory tightening and a fresh virus outbreak weighed on activity

• China Evergrande’s yuan bonds fell sharply Monday, with onshore traders citing the move as an extension of Friday’s selloff in the developer’s dollar notes

–With assistance from Gowri Gurumurthy and Ben Scent.