By Chiara Elisei, Nell Mackenzie and Pablo Mayo Cerqueiro
LONDON(Reuters) – Banks are whittling down a pile of unsold loans that backed private equity buyouts in the cheap-money era and trying to avoid heavy hits by refinancing the debt or selling chunks in secondary markets, bankers and investors said.
The stock of unsold loans in Europe is now less than 5 billion euros ($5.4 billion) from around 15 billion euros in the third quarter, two bankers estimated.
Until the loans are offloaded, banks’ capacity to underwrite new large buyout financing is limited, holding back mergers and acquisition (M&A) activity that slumped 27% in Europe last year.
Some banks are now selling new loans to investors to repay existing debts that were on their books and linked to M&A deals.
This was recently the case with French IT services firm Inetum, acquired by private equity (PE) house Bain Capital last July, one of the bankers, a third banker and an analyst said.
Earlier this month, Inetum’s banks led by BNP Paribas and Credit Suisse sold a roughly 343 million euro loan to investors to repay an original facility kept on their books, they said.
Public debt markets were frozen for much of 2022 due to war in Ukraine and aggressive rate hikes globally, so banks changed the structure of such loans and moved them from their trading to banking books to avoid having to mark down the loans and take a loss.
A trading book includes loans banks have earmarked for sale and are thus marked-to-market, while a banking book is where a lender holds loans and other assets not intended for disposal.
Fitch Ratings’ Head of European Leveraged Finance Ed Eyerman said the point of making such changes was to then refinance the loans when conditions improve, as they are now.
Inetum’s new loan was increased from an original target size of 100-150 million euros, the third banker and the analyst said.
OFFLOADING
Many lock-up arrangements that restricted banks from offloading debt earlier have also now expired, allowing banks to find buyers in the secondary markets.
A few banks, including Goldman Sachs, recently sold some sterling-denominated loans arranged to back the acquisition of UK supermarket Morrisons by PE firm Clayton Dubilier & Rice (CD&R), the first and a fourth banker as well as two investors told Reuters.
Goldman Sachs declined to comment.
Other loans sold include those supporting CVC Capital Partners’ purchase of tea firm Ekaterra from Unilever last July, the first banker and a third investor said.
“Initially (banks) couldn’t sell the loans because of certain restrictions but now that they’ve expired they can obviously offload,” said Amine Nedjai, CEO of $100 million family office Alpha Blue Ocean.
“Last year at this time, banks were probably thinking, ‘good times will continue I can always sell it off'” said Nedjai, adding that by the time the deals related to the acquisition of software firm Citrix Systems and social media platform Twitter closed last year, markets were down and the value of the debt on these transactions took a knock.
“This left banks holding the bag.”
Banks either held auctions or bilateral talks with prospective investors, one of the bankers and the investors said.
In addition to traditional loan investors, buyers increasingly include hedge funds and private debt funds lured in by juicy returns, they added.
While sentiment has improved, offloading the loans still comes at a price for the banks.
For instance, the price of Morrisons’ sterling-denominated loans is around 85 pence, Refinitiv data shows. This implies a heavy discount of 15 pence on the pound if banks sell the loans at that level.
Banks make money also by charging the borrower a fee to provide loans, then sell the loans to third party investors. But if these loans are sold at a discounted rate, banks can lose money.
Reuters could not ascertain the exact size of the hit on the loans sold.
On the flipside, loans sold by banks can generate attractive gains for buyers. Some Ekaterra loans were sold in the low 80s pence range, and prices are now near 90 pence, the first banker and the first investor said.
($1 = 0.9185 euros)
(Reporting by Chiara Elisei, Nell Mackenzie and Pablo Mayo Cerqueiro; Editing by Dhara Ranasinghe and Mark Potter)
