For months on end, Wall Street banks were stuck holding $5.4 billion of debt for Apollo Global Management Inc.’s leveraged buyout of Tenneco Inc. as the Federal Reserve’s rate hikes rattled credit markets — and would-be buyers disappeared.
(Bloomberg) — For months on end, Wall Street banks were stuck holding $5.4 billion of debt for Apollo Global Management Inc.’s leveraged buyout of Tenneco Inc. as the Federal Reserve’s rate hikes rattled credit markets — and would-be buyers disappeared.
The firms were forced to hold the debt for so long, in fact, that they wound up with a small silver lining: interest payments that were large enough to cover most of the losses that piled up as markets moved against them and their capital remained locked in limbo.
On Tuesday, markets thawed enough to finally allow the group of more than a dozen banks led by Citigroup Inc. and Bank of America Corp. to sell off over half of the debt that financed the Tenneco acquisition. The $1.2 billion leveraged loan and $1.9 billion of junk bonds were sold to investors for just 85 cents on the dollar, saddling the banks with losses of more than $270 million, after factoring in fees and the pricing flexibility provided for underwriting the deal.
But the time the debt stayed on their books also allowed the banks to benefit from high interest rates. In the roughly nine months since the private equity firm closed the purchase of the auto-parts maker, they received around $210 million in interest payments, offsetting most of the hit, according to estimates compiled by Bloomberg and market participants familiar with the deal.
The Tenneco sale is the latest example of how investment banks are chipping away at the more than $40 billion pile of such debt they were left holding when the Fed brought an abrupt end to the near-zero rates of the pandemic. The financing was among the biggest of those stranded deals, outstripped by only a couple of others, such as the $12.5 billion financing for Elon Musk’s purchase of Twitter Inc., now known as X.
With investors now wagering that the central bank is done tightening monetary policy and the economy proving surprisingly resilient, banks are again able to offload chunks of the acquisition-related debt to institutional money managers. It’s another sign of business-as-usual returning to corners of the US credit markets.
The outcome, of course, doesn’t make up for separate costs, including the inability to make other loans as banks’ capital was tied up for so long. And they still haven’t offloaded all of the Tenneco debt, nor is it clear when they will be able to do so. Moreover, the actual losses on Tuesday’s sale could exceed the estimates, depending on the exact size of the interest payments and other details that aren’t public.
Representatives for Citi, Bank of America, and Apollo declined to comment. Representatives for Tenneco did not respond to a request for comment.
Yet the sale marks one step toward concluding a long saga for banks stuck with the Tenneco debt.
Apollo announced the acquisition in February 2022, just before Russia’s invasion of Ukraine unsettled global markets. The Fed started raising interest rates the following month, initiating the aggressive monetary policy tightening that has pushed its benchmark rate from near zero to the current range of 5.25% to 5.5%.
As is typical with such takeovers, banks committed to lend the money with the intention of selling the debt to investors before the deal closed. But by November, when Apollo completed the acquisition, debt buyers had grown scarce as the corporate junk-bond market headed toward the worst annual losses since the 2008 credit crisis and leveraged-loan prices remained depressed. As a result, the banks had to provide the cash themselves.
The scale of that selloff meant that the price of the bonds and loans would have to be cut to account for the surge in interest rates. That shifted risk to the banks, which agree to cap companies’ borrowing costs based on market levels at the time such a financing is struck. When the Tenneco deal was announced, junk bonds were yielding around 5.7%. It’s around 8.5% now.
Even after Tuesday’s sale, though, the banks are still holding a $1.3 billion term loan A and $1 billion of unsecured bonds related to Apollo’s buyout of Tenneco.
Those have generated around $180 million of additional interest for the first three-fourths of this year, according to Bloomberg’s estimates. But if the banks try to eventually sell the unsecured debt, which is considered riskier because it is not backed by specific assets, they will likely have to do so at a steeper discount than Tuesday’s transaction, unless the market’s tone improves significantly.
Banks are also contending with two other large buyout-debt deals they’ve yet to sell. In addition to the Twitter obligations, a group led by Barclays Plc and Bank of America holds around $5 billion of debt committed for another Apollo transaction — the acquisition of broadband and telecommunications company Brightspeed.
–With assistance from Lisa Lee and Michael Tobin.
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