(Bloomberg) -- Trouble for banks stuck with unwanted buyout financing is an opportunity for investors in the $187 billion distressed debt market, according to Canyon Partners Chief Investment Officer Todd Lemkin.
“We love these hung bank bridge loans,” Lemkin said in the Oct. 6 episode of Bloomberg Intelligence’s FICC Focus State of Distressed podcast. “It’s a great place to look for opportunity.”
Lemkin’s firm is shopping for some of the debt banks are offering at steep discounts as deals underwritten in sunnier times meet resistance in a tightening credit market. In the months since the banks committed to backstopping some leveraged buyout deals, interest rate hikes have challenged the landscape for investors, who are now demanding higher yields to hold risky debt.
Banks are either opting to keep the debt on their books until markets improve or trying to woo reluctant buyers by selling the debt at prices below face value -- or both.
“It’s just astounding where some of these price points are going,” Lemkin said, citing discounts of as much as 15 points or more. “And they are, in some cases, reasonable credits.”
Banks running the financing for the buyout of Citrix Systems Inc. earlier this month took $600 million in losses on discounted debt and took another $6.5 billion on to their own balance sheets rather than realize hundreds of millions more. They may look to sell the debt once markets improve.
“Everybody in the room, so to speak, knows this is temporary because it’s so extreme,” Lemkin said of the recent fire sales.
In the podcast, Lemkin also discussed the impact of mounds of cash being dedicated to distressed investing, as well as shifting intercreditor dynamics.
“There are some very large pools of capital that have been locked up under the distressed umbrella that funds have to be antsy to deploy,” he said. As for the competition they pose to his own firm’s hunt for deals, “I do worry about it. It’s an unfortunate reality,” he said.
The increased size of distressed funds has also contributed to the rise of intercreditor clashes, Lemkin said.
“The creditor brotherhood that once existed no longer exists,” he said. “The common bond used to be: we need ten of us to agree that we’re going to fund this deal. Now, there’s more capital, so people can do things individually.”
(Updates to add size of distressed debt market in first paragraph)
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