Buyout Loans Sell at a Discount as Recession Fears Mount

Last week, bankers led by JPMorgan Chase & Co. slapped the biggest discount seen in 2022 on a leveraged loan just to get the $1.5 billion deal off the books and into the hands of investors. The debt was sold at price equivalent to 89 cents for every dollar borrowed to back the merger of two private equity-owned companies, Material Handling Systems Inc. and Fortna Inc., Bloomberg News reported. That promises a handsome return to investors — but it’ll be disappointing, and possibly costly, for the banks involved.

This is no one-off bad transaction. Borrowers and investors are seeing sharply rising interest costs and knockdown prices in the market for risky, junk-rated loans. The surge in inflation and fears of potential recessions that are playing havoc with stocks, bonds, currencies and crypto are hurting loans too. This is a problem for banks that underwrite loans and sell them to investment funds. The average discount on loans sold over the past month is the biggest in a decade with prices averaging 95.5 cents on the dollar, according to Michael Anderson, an analyst at Citigroup Inc.