Wall Street banks are being forced to sell leveraged loans at the steepest discounts in four years as sentiment sours for risky assets amid a commodities slump.
The average discount needed to sell U.S. first-lien loans in October widened to 97.13 cents on the dollar from 99.10 cents in September, according to data compiled by Bloomberg. The difference translates into an extra $18 million in increased costs for every $1 billion borrowed.
Fullbeauty Brands LP, an apparel retailer for plus-sized people, issued a $820 million loan backing its buyout by Apax Partners at 93 cents on the dollar, according to data compiled by Bloomberg. That’s one of the biggest discounts offered this year on a loan. Foundation Building Materials borrowed a $245 million loan backing Lone Star Funds’s takeover of the construction materials distributor at 95 cents.
Leveraged loans are losing favor with investors pulling cash for 12 straight weeks from mutual funds that invest in the debt. Offering loans at a discount boosts investor yields and can also eat into underwriting fees and create losses for banks.
The slowdown in the loan market comes after a boom with issuance reaching a record $704 billion in 2014 as the Federal Reserve’s easy-money policies spurred investors to seek riskier debt. Now with the U.S. central bank moving closer to raising borrowing costs loan issuance has fallen to $306 billion this year down from $438 billion during the same period in 2014.
“The continuing threat of rising interest rates remains a headwind to the primary loan market,” Bank of America Corp. strategists led by Michael Contopoulos wrote in a report Monday.
The average original-issue discount needed to sell loans this month is the most since 96.44 cents in October 2011, Bloomberg data show.