Banks put a brake on leveraged loans due to volatility | ECONOMY

At the beginning of 2022, the loans leveraged seemed easy to sell on Wall Street. With the Federal Reserve poised to raise rates, it was said, demand for floating-rate debt could only get stronger.

Yet this week banks have slammed on the brakes even on relatively safe loan sales, as the Fed begins to hike rates and the war in Ukraine raises concerns about inflation. There is now a growing risk that banks will find it difficult to unload the billions of dollars of riskier transactions they have left to sell.

Leveraged loan prices have been falling for weeks, but managed to rise about half a cent on the dollar, or half a point, on Wednesday.

“It’s hard to price risk when the market is up or down half a point every day,” said Lauren Basmadjian, head of US loans and structured credit at Carlyle Group Inc., who said investors are now reluctant to send deal orders until the last day of the sales process.

The demand to buy leveraged loans has quickly faded. Prices hit 95.88 cents on the dollar on average Tuesday after trading above 99 cents in January, according to data from the S&P/LSTA Leveraged Loan Index. Just 1.2% of loans traded above face value, a 17-month low, according to a JPMorgan Chase & Co. report this week. At the end of January, more than 45% did.

With so many loans trading at such low prices, it’s hard to find that many investors willing to buy new debt at face value. Avis Budget Group had to sell loans at 97 cents on the dollar on Tuesday, and other companies will likely have to do similar discounts.

Money managers who buy leveraged loans and bundle them into securities known as collateralized loan obligations have less interest in buying the debt recently. Their own financing costs have risen, especially for the higher-rated securities they sell, making it harder to strike deals. And US leveraged loan funds could post their first weekly capital outflow in more than three months, as demand for risky assets fades and debt prices fall.

Banks often get stuck buying debt when markets weaken and economic growth slows. And in this case, the damage could be comparatively light. Deutsche Bank estimates there is about $40bn in upcoming US leveraged loans that banks are required to fund, and earlier this month, Bloomberg estimated the European portfolio was about $37bn.

In the financial crisis, the backlog of loans to sell at one point was estimated by CreditSights to be about $237 billion. Post-crisis financial regulations have made it more difficult for banks to take inordinate risks.

Even with the recent market weakness, some companies are still trying to borrow money. Bulk storage products maker Tank Holding Corp. is seeking a $1.7 billion, one-tranche loan, in its second bid for the financing. That transaction launched on Tuesday. Investors who buy larger chunks of the loan will pay lower prices, according to a person with knowledge of the matter.

–