WASHINGTON, Feb 3 (Reuters) – Banks are hoping to quicken the pace of unloading at least some of the billions of dollars of leveraged buyout debt that has been stuck on their balance sheets since last year, thanks to a further rise in bonds. U.S. junk after Federal Reserve Chairman Jerome Powell’s dovish-than-expected comments this week.
Banks have been selling small slices of LBO debt to some companies since early December, when optimism of easing inflation and a potential Fed pullback in rate hikes boosted demand for junk bonds .
This exercise now has more momentum on expectations that junk bond prices will continue to recover following Powell’s comments, which raised hopes of a slowdown in rate hikes and a so-called economic soft landing.
“Powell’s remarks gave the market more confidence in the possibility of a soft landing and opened the window for this rally to continue,” said Christina O’Hearn, head of leveraged loans and CLO. at Pretium Partners LLC.
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Junk bond spreads tightened by an average of 37 basis points on Thursday, the day after Powell’s remarks, from the day before, according to data from ICE BAML.(.MERH0A0).
The tightening “should make it easier for banks to sell paper at better prices,” said Jeremy Burton, portfolio manager, leveraged finance group, at PineBridge Investments.
There have been private transactions since December on the $2.5 billion term loan. Part of a $15 billion global debt financing that backed the private LBO of Citrix Systems, three sources familiar with the matter said.
In January, there was trading at 91 cents to the dollar, the sources said. That’s around September’s level when banks sold only about half of the total $15 billion in debt through a US dollar bond, leveraged loan and a loan denominated in euros. Private trades made in December were priced pennies lower, one of the sources said.
Reuters could not confirm the exact amount sold in these sales and the remaining LBO debt remains with the banks. Lead arrangers Bank of America Corp (BAC.N), Credit Suisse (CSGN.S) and Goldman Sachs (GS.N) declined to comment.
Tens of billions of debt subscribed last year still weigh on banks’ balance sheets, including $13 billion financing the takeover of Twitter by billionaire Elon Musk.
Banks could consider selling larger lots of LBO debt in primary bond markets where there has been an increase in the supply of new issues, the sources said.
In January, $20.35 billion in 25 new junk bonds were sold in the primary market, more than the $16.5 billion through 18 deals issued in the fourth quarter of 2022, according to data from Informa Markets.
“Given cheap valuations (especially for suspended debt), investors are likely to increase their demand for new paper,” said Chris Alwine, global head of credit at Vanguard. He added that demand was also outstripping supply for new issues and that would continue “until the full impact of Fed tightening increases the risk of a recession in late 2023.”
(This story has been corrected to change the day to Thursday from Wednesday in paragraph 5)
Reporting by Matt Tracy in Washington; Editing by Shankar Ramakrishnan and Matthew Lewis
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