Tariffs Stoke Fears That Hung Debt Will Return

(Bloomberg) — Deals in leveraged finance have stalled, and markets have been upended, raising the possibility that banks might once again get stuck with debt they’ve committed for acquisitions.

US President Donald Trump’s announcement of the steepest American tariffs in a century this past week stoked recession fears and sent stocks plunging. Financing for a Canadian auto-parts maker and a deal supporting H.I.G. Capital’s bid for a Canadian software provider were both delayed, creating risks for the lender groups, as the fallout rippled through leveraged finance markets.

“For the time being, we need things to calm down before new risk is put in front of investors,” said Kelly Burton, a managing director who covers US high-yield investments at Barings. “It’s hard to justify why you would try to price out ‘early looks’ right now with the market on unsteady ground.”

Wall Street lenders typically sell credit they’ve committed for an acquisition before it closes, but face the prospect of being left with so-called “hung” debt if they can’t move underwritten loans off their balance sheets by that time. Banks including Citigroup Inc. and JPMorgan Chase & Co. face an April deadline to close ABC Technologies Holdings Inc.’s purchase of TI Fluid Systems Plc, while a $900 million leveraged loan sale failed to attract enough investor demand by the Thursday deadline. A $1.325 billion junk-bond sale hasn’t launched.

Meanwhile, a Bank of Montreal-led deal to fund H.I.G.’s purchase of Converge Technology Solutions was also struggling to drum up enough investor support for a separate loan sale. The deadline passed on Tuesday, though banks have until the end of June before the acquisition is slated to close.

The turbulence was visible in other parts of the credit market too. An attempt to refinance $660 million of junk debt for Chuck E. Cheese owner CEC Entertainment fell short as investors shied away from consumer-facing companies, while efforts to refinance more than $5 billion of private credit loans from Finastra Group Holdings Ltd. fell apart.

New issuance of junk debt, too, has ground to a halt in the US. The past six trading sessions saw just one new high-yield bond and no leveraged loan launches. 

“Why commit a bunch of new capital in front of risk?” said Jeremy Burton, a managing director at PineBridge Investments. 

The last time banks were left with hung debt came when the US Federal Reserve began raising interest rates three years ago to fight inflation. Investors became less willing to buy the debt of junk companies as a result because they could earn more from safer investments.

European borrowers had largely weathered the resurgent volatility in leveraged finance markets. On Monday, banks managed to sell €7.45 billion of debt to help fund Clayton Dubilier & Rice’s purchase of a stake in Sanofi SA’s consumer health division, in one of the most hotly anticipated deals of the year. While the issuer made some concessions to investors on documentation, the deal priced in line with expectations.

The deal was part of the tens of billions of dollars of leveraged buyout packages that Wall Street lenders were working on, a sign that M&A activity had started to pick up, though that was before the worse-than-expected trade taxes were announced by US President Donald Trump.

–With assistance from Bruce Douglas and Rheaa Rao.

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