Markets

Lisa Abramowicz is a Bloomberg Gadfly columnist covering the debt markets. She has written about debt markets for Bloomberg News since 2010.

Shira Ovide is a Bloomberg Gadfly columnist covering technology. She previously was a reporter for the Wall Street Journal.

Leveraged-finance bankers are facing a bad hangover after a record year for U.S. mergers and acquisitions.

They must find buyers for about $49 billion of acquisition-related leveraged loans, which is the biggest backlog for a December in Standard & Poor’s Capital IQ LCD data going back to 2010. That doesn’t even include the billions of dollars of M&A-related junk bonds that are also in the pipeline. There’s about $200 billion of M&A-related investment-grade debt that needs to be issued based on announced deals, according to Barclays estimates. That’s also well above average for this time of year.

Big Backlog
The volume of debt that needs to be sold to finance announced mergers and acquisitions has surged.
Source: S&P Capital IQ LCD

The financing glut comes as appetite for riskier debt is drying up, with a growing number of debt offerings being pulled or postponed. Values of the lowest-rated debt are plummeting. Some companies that were thinking about making acquisitions have shelved their plans until the leveraged-finance capital markets seem more stable.

That time may soon come, as in early next year, making it easier for the shepherds of 2015's M&A boom. Right now, however, the $2 trillion junk-debt market looks vulnerable, and there's clearly a bit of nervousness on Wall Street. Speculative-grade bonds have declined 2.1 percent this year, putting the debt on pace for its first annual loss since 2008. An index of the largest leveraged loans had fallen by 1 percent through mid-November, and a growing number of highly indebted companies have negative outlooks.

Waning Demand
Investors are less willing to buy lower-rated loans than they were earlier this year.
Source: S&P and LSTA

Wall Street banks, meanwhile, are already taking steps to insulate themselves from losses in case no one wants to buy lower-rated acquisition-related loans and bonds.

Big banks led by JPMorgan Chase, for example, secured crisis-era concessions from Dell to finance its $67 billion acquisition of EMC. That includes being able to sell prospective loans with yields as high as 12 percent, which is twice the going rate for such debt, the Wall Street Journal reported this week.

Others are already starting to sweat. Morgan Stanley was struggling to sell $630 million of loans backing the private-equity buyout of eBay’s enterprise business because of a lack of demand, Bloomberg reportedat the end of November. Solera Holdings recently postponed a planned debt sale backing its purchase by Vista Equity Partners until early next year after being advised by its bank Goldman Sachs to await an improvement in market conditions, Bloomberg reported.

If credit investors remain discerning even after their New year's celebrations, this debt will be a difficult lump for Wall Street to digest. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the authors of this story:
Lisa Abramowicz in New York at labramowicz@bloomberg.net
Shira Ovide in New York at sovide@bloomberg.net

To contact the editor responsible for this story:
Daniel Niemi at dniemi1@bloomberg.net