Why ‘Hung Debt’ Is Causing Lingering Pain for Banks

For banks, lucrative transactions often pay so well because they carry high levels of risk — meaning, they may end up not being lucrative at all. Some of the world’s biggest banks are living that reality after having to sell, at discounts as high as 35%, much of the roughly $80 billion in “hung debt” they raised to facilitate mergers and leveraged buyouts before deal activity slowed to a crawl. The only thing worse than selling debt at a discount is not being able to sell it except at a level considered not just painful but punishing. That’s where Bank of America, Morgan Stanley and Barclays and a few others find themselves after helping to finance Elon Musk’s ill-fated purchase of Twitter, now known as X.

Banks can make big profits by raising capital to finance mergers and leveraged buyouts, known as LBOs, as middlemen. As part of the process of helping acquirers raise capital, banks often act as a backstop lender, committing to offer financing at a predetermined rate. The idea is that they’ll help the deal close by putting themselves on the hook for the necessary funds — briefly, ideally — before selling the loans or bonds to investors. But if things don’t work out as planned, banks can get stuck with debt worth less than they had accounted for, making the debt difficult to sell. This leaves banks with the choice of unloading it at a loss or hanging onto it in the hope that it can be sold on better terms later. That’s hung debt.