If the messiest leveraged buyouts suddenly look interesting to Wall Street debt investors, then a soft landing for the economy may be afoot. The big banks have for months struggled to sell off the debt they extended to fund private equity acquisitions. These bridge loans have been clogging bank balance sheets even when loan and bond yields have been approaching or exceeding 10 per cent.
In recent days, lenders to the $16bn buyout of Nielsen Holdings, the media data company, have steadily offloaded billions of debt backing the transaction. The easing of conditions comes as the latest US inflation reading showed slowing price increases, even as the labour market and economy remain resilient.
For fixed-income investors that presents an opportunity. Widened credit spreads along with increased base interest rates have pushed yields to levels not seen in years. For example, the Moody’s A-rated corporate bond index is offering an annual yield of about five per cent, a figure not seen in a decade. The temptation is to lock in such yields at a time when risks may be moderating.
The same risk-on posture appeared in late summer — only to be quashed by the Federal Reserve’s commitment to crushing inflation followed by data showing consumer prices remained stubbornly resistant. The Fed itself has indicated it will keep raising rates though the slope of those increases should be flattening.
Over the past five weeks, high-yield bond funds have pulled in $12bn, a winning streak not seen since the stimulus-charged 2020, according to data compiled by Leveraged Commentary & Data. But overall, investors have yanked nearly $30bn of cash from high-yield funds in 2022.
Even as corporate debt investors start to bite at leveraged buyout debt, most new deals remain on hold. Any debt sold on has required sweeteners for buyers. In previous tightening cycles, buyers of congested LBO debt — often savvy private equity firms — made double-digit returns simply by waiting for lending banks to offer bargains. That tactic is one ordinary institutional investors could now selectively adopt.
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