Do investment banks take on any risks in a LBO?
Was reading up on LBOs and was wondering if the banks take on any risks cause it seems like they just syndicate all the bank debt, from RCF to term loans, to institutional investors. Also, is the bank debt in an LBO, including RCF and TLA, all non-investment grade?
They take syndication risk in that case. Have seen LBO term loans being sold 90c : $1 and worse. Leave it to the Lev Fin guys to answer the rest.
I think that there is 2 types of risk that we take (the LevFin Guys):
1) desired exposure: usually in the RCF shared with other banks that worked on the deal and maybe a bit of the most senior TL to show interests are aligned and make the sponsor happy (usually in the 5-10m range from my exp).
2) Undesired expsoure: we try to syndicate a deal, sponsor doesn't want to raise the interest/OID because there are some investors interested but not enough to take 100% of the deal thus we have some leftovers on our hands. This is where in LevFin you usually loose money (yes there is a team in IBD that can loose money) because you are a forced seller in most cases due to regulations - a FIG guy will say that Non-IG debt on a Banks balance sheet is equal or over 100% in RWA. So we start selling our TL at say 100 or OID at issuance and go down slowly until we can sell our exposure - exactly whar Rover said, it rarely goes below 85c : $1 or at least haven't seen it here in Europe where yields are so low.
would be cool to know
most of the time they’ll take some balance sheet risk - if they’re just arranging the financing and not planning to take and hold - could be a red flag (why are we lending and you aren’t etc.)
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