(Bloomberg) -- A group of banks led by Citigroup Inc. and Bank of America Corp. are preparing to fund about $5.4 billion of debt helping to finance the leveraged buyout of auto-parts maker Tenneco Inc., according to people with knowledge of the matter.

The decision comes as banks attempt to sell a portion of the debt package to investors in the form of $2.4 billion of leveraged loans and junk bonds. Those debt offerings have been struggling to attract investor demand, but Apollo Global Management Inc.’s take-private of Tenneco is expected to close on Thursday, the people said. 

That means the banks will need to fund the debt by closing, and then pay themselves back with whatever they are ultimately able to offload to investors, the people added, asking not to be identified discussing a private transaction.

It’s been more challenging for lenders to sell risky debt to money managers as concern mounts that the Federal Reserve’s fight against inflation will tip the US economy into recession. That has drained demand for low-rated debt tied to buyouts, leaving banks saddled with about $40 billion in hung debt, according to data compiled by Bloomberg. The Tenneco transaction will add to that pile.

Representatives for Citigroup, which is leading the loan, Bank of America, which is leading the bond, Apollo, and Tenneco declined to comment. 

The path for Tenneco’s buyout financing has been winding. While the lenders had originally committed to provide a debt package in the form of a $2.4 billion leveraged loan, a $2 billion secured bond and a $1 billion unsecured bond, they struggled to lure investor demand in July, and then again in October. They’d resigned themselves to likely having to fund the transaction -- until a window opened.

About two weeks ago, a rebound in risk appetite and improving credit markets allowed banks to launch a smaller version of the debt financing to try and offload at least some of the commitments. The banks had to offer steep discounts to par, and they could face losses on the debt financing as a result.

The $1.4 billion loan portion of the financing has been offered at 84 cents to 85 cents on the dollar, one of the steepest discounts this year, and a margin of 500 basis points over the Secured Overnight Financing Rate. Commitments were due at 12 p.m. New York time Monday, but the deal is not expected to wrap up today, the people added.

The $1 billion secured junk-bond offering saw early pricing discussions for an 8% coupon with a discount for an all-in yield of 12%, which imply a discounted price of roughly 83 cents on the dollar, according to Bloomberg calculations. The roadshow was originally expected to last through Nov. 10, but banks have not yet released official price talk.

Investors have pushed back over legal protections known as covenants and have been negotiating for improvements in these terms, Bloomberg reported. Separately, there’s concern surrounding the feasibility of about $400 million of cost-saving measures that the company is using in its earnings projections.

--With assistance from Jill R. Shah.

©2022 Bloomberg L.P.