Saw the article on WSJ about Goldman and Baml losing 500mm on the citrix deal. How is this even possible. How does this work? Why wouldn't the banks line up the investors ahead of time instead of taking on all the risk
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Not 100% certain the below is correct but here is how I understand it:
I believe that regulators only allow banks to hold a certain amount of the risk of the loan/HY bond on its balance sheet, therefore they have to syndicate this out. They likely had enough commitments from other banks to create a lender group and to close, but decided to do a “best efforts” deal to syndicate the rest.
The debt market has been extremely volatile recently, making it extremely hard to get the loan off their books, but they are still forced to sell the rest due to regulations. Therefore they had to take a loss on the HY bond, as they had to make the bond more attractive to investors by lowering its FV so someone would take it off their books.
Normally you get an up front fee to syndicate but that fee didn’t cover the money they lost from syndicating it for a lower price.
This is generally correct but the banks provided an underwrite guaranteeing execution of the financing, not a best efforts syndication. If it were best efforts the banks would not be taking a loss.
This makes sense, thanks for clarification
Thank you, why would they not do Best efforts well knowing how bad the markets are
In all LBOs, the bank will underwrite the whole thing. Certainly they will have a bunch of buyers lined up (eg direct lenders) who come in for large tickets, but its rarely the entire loan amount.
Think about it, if a sponsor is acquiring a company for a certain price, they need a guarantee that they will get the full amount to make the acquisito work. On the flip side, in HY bond issuance, banks will always go on a best effort basis.
The reason GS and a bunch of other banks are losing money is that investors are simply expecting higher and higher yields as rates go up, forcing the banks to discount the price of the loans. I think BNP have just decided to hold the loans in their treasury to avoid having to post a loss, however they have a huge balance sheet and can afford to do this.
This isn’t how it works. Bonds are absolutely committed and are almost never ever issued on a best efforts basis for acquisitions. The banks commit to an adjustable rate bridge loan subject to caps which is taken out after the bonds price. Every dollar of OID that goes past the cap (it’s 100 in good markets for bonds) the banks lose money on.
When I say HY bond i'm referring to a corporate borrower outside a transaction context.
Citrix and the Sponsor were significant relationships to a large portion of the lender group. The banks would provide a underwrite guaranteeing execution of financing, not a best efforts.
Underwritten financing, this is always the risk. It is a firm commitment to funding a transaction, and a costly one at that.
You negotiate “flex”, which essentially says “if the market doesn’t accept the deal at the price, we are allowed to increase the price by this amount”.
Once you fully flex the deal, and the exposure is still not off your books, you eat into the underwriting fees the sponsor paid you.
Once you are past the underwriting fees, you have to start selling the deal at an even greater amount, which is on the banks since the Sponsor only agreed to the “flex” pricing as mentioned above.
The Citrix deal was agreed to pre-market shitting, so the pricing was too low and the flex was not enough to cover where the market has turned. Thus the banks are on the hook to get the debt of their books, at a sever loss to them.
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