Renewed U.S. junk bond rally ignites hope for more stuck buyout debt

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WASHINGTON (Reuters) – Banks are hoping to quicken the pace of offloading at least some of the billions of dollars of leveraged buyout debt stuck on their balance sheets since last year, on a renewed rally in U.S. junk bonds after Federal Reserve Chairman Jerome Powell’s more dovish-than-expected comments this week.

Banks have been selling small parcels of LBO debt in some companies since early December, when optimism of easing inflation and a potential Fed pullback in rate hikes drove demand for junk bonds.

This exercise now has more impetus on expectations that junk bond prices will continue to rally in the wake of Powell’s comments, which raised hopes of slowing rate hikes and a so-called economic soft landing.

“Powell’s remarks have given the market more confidence that a soft landing can be achieved, and opened the window for this rally to continue,” said Christina O’Hearn, leveraged loan and CLO manager at Pretium Partners LLC.

Junk bond spreads on average tightened 37 basis points on Wednesday, the day of Powell’s remarks, from a day earlier, according to ICE (NYSE:ICE) BAML data. Meanwhile, yields tightened 9 basis points over the same time frame.

The tightening “should make it easier for banks to sell off paper at prices that are better,” said Jeremy Burton, portfolio manager, leveraged finance group, at PineBridge Investments.

There were private trades since December in the $2.5 billion Term Loan A piece of an overall $15 billion debt financing that backed the take-private LBO of Citrix Systems (NASDAQ:CTXS), said three sources familiar with the matter.

In January, there were trades at 91 cents on the dollar, the sources said. This is around the level in September when banks sold only about half of the total $15 billion of debt through a U.S. dollar bond, leveraged loan and a Euro-denominated loan. Private trades done in December were at prices a few cents lower, said one of the sources.

Reuters could not confirm the exact amount sold in these sales and balance of LBO debt still left with banks. Lead arrangers Bank of America Corp (NYSE:BAC), Credit Suisse and Goldman Sachs (NYSE:GS) declined to comment.

Tens of billions in debt underwritten last year still hang on banks’ balance sheets, including $13 billion financing the buyout of Twitter by billionaire Elon Musk.

Banks could consider selling larger parcels of LBO debt in the primary bond markets where there has been a surge in new issue supply, said the sources.

In January, $20.35 billion in 25 new junk bonds were sold in the primary market, more than the $16.5 billion via 18 trades issued in the fourth quarter of 2022, according to Informa Markets data.

“Given cheap valuations (especially in hung debt), investors are likely to increase their demand for new paper,” said Chris Alwine, global head of credit at Vanguard. He added that demand also exceeded the supply of new issues and that would continue “until the full impact of the Fed tightening raises the risk of a late 2023 recession.”