Banks are offloading some of the risky buyout debt that’s weighed down their balance sheets after the expiration of key restrictions.
(Bloomberg) — Banks are offloading some of the risky buyout debt that’s weighed down their balance sheets after the expiration of key restrictions.
Goldman Sachs Group Inc. has agreed to sell its remaining £25 million ($31 million) or so of sterling loans in Wm Morrison Supermarkets Plc, according to people familiar with the matter. Goldman was also among banks — including Bank of America Corp. and Barclays Plc — that sold their sterling loans in Ekaterra BV, a tea business Unilever Plc sold to CVC, the people said, declining to be identified because the information is private.
The sales are a fraction of the $40 billion of risky loans and bonds on banks’ balance sheets, but it’s a start. Financing terms had prevented the banks from selling off the hung debt without coordinating with other lenders, or undercutting existing investors. The clauses expired at the end of last year, opening the door for banks to sell the loans more easily.
So-called hung debt has become a problem for banks that have taken huge mark-to-market losses on deals they underwrote before a rapid rise in interest rates crushed funding markets. Aside from the lack of appetite for risky assets, the restrictions prevented some banks from selling off the debt. One of the most common is the so-called most-favored-nation clause, also known as MFN, which ensures one client isn’t treated differently from another, within a certain time frame.
Representatives for BofA, Barclays and Clayton Dubilier & Rice — which owns Morrisons — declined to comment, while Goldman Sachs and CVC didn’t respond to requests for comment.
With the restrictions lifted, and global credit markets rallying, some banks are managing to offload some of the debt, but at steep discounts. Goldman offloaded its Morrison debt to a credit hedge fund at a discount, at around the mid-80s pence on the pound, the people said. Other banks holding an outstanding £300 million of the sterling-denominated term-loan B are also in discussions with credit hedge funds about selling, they said.
Morrison’s pricing is roughly where some lenders recently sold sterling debt tied to Ekaterra, the people said. That’s about 10 points below a deal that banks struck with buyers in the summer, and a sign that while the market is open, pricing is unforgiving, especially for junk-rated credits.
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