A chunky corporate debt sale viewed as a test of US capital markets has ended with disappointing results after bankers were forced to offer cut-price bonds and loans to fund the leveraged buyout of software company Citrix.
Investor orders barely covered the $8.55bn debt package on offer, with many big money managers and hedge funds refusing to lend to the business, said people briefed on the matter.
Orders for a $4bn secured bond being sold reached $4.6bn on Monday, the initial deadline for investors to signal their willingness to lend, three people said. Orders for a $4.05bn US dollar term loan were more robust at $5.5bn, people familiar with the deal said. However, investors generally judge a bond deal to be healthy when orders are at least twice as big as the deal size.
The lacklustre investor interest reflected the fragile state of US credit markets, the lifeblood of the buyout industry. Companies with low debt ratings have encountered difficulty raising funds as the global economy slows and central banks raise interest rates to combat inflation, in turn increasing borrowing costs.
Banks led by Bank of America, Credit Suisse and Goldman Sachs have been struggling to offload debt from their balance sheets after agreeing to arrange financing for Vista Equity Partners’ and Elliott Management’s purchase of Citrix in a deal agreed in January. The $8.55bn debt offer is a portion of the entire $15bn debt package prepared for the deal.
A hedge fund portfolio manager who reported being approached by Credit Suisse on the secured bond was surprised to hear from the lender.
“If they’re calling us to find out what terms we would do on the secured bond deal, they’ve really gone down the list,” the manager said, pointing out that the fund does not typically operate in the high-yield credit space.
The tepid demand comes despite steep discounts on the bond and loan that became significantly deeper in recent days, as well as tougher investor protections in the loan documents that were tweaked after bankers bowed to creditors’ demands.
Banks were pitching Citrix bonds at a discounted price of 83.561 cents on the dollar, which would lift the yield on the debt to 10 per cent, far above the “high” 8 per cent range that was marketed earlier this month, said people with knowledge of the deal.
The loan was set to be priced at a discounted 91 to 92 cents on the dollar with an interest rate of 4.5 percentage points above Sofr, the floating interest rate benchmark, for a yield of 10 per cent. The bond and loan deals are expected to be finalised on Tuesday.
“This Citrix deal has shown [banks] can’t just bring any deal to market,” said Andrew Forsyth, a senior portfolio manager at Barksdale Investment Management. “And the market hasn’t been tested because the supply has been so light. We’ve wondered at what point . . . it becomes a concern.”
Bank of America, Credit Suisse and Goldman declined to comment. Vista and Elliott did not respond to requests for comment.
Additional reporting by Robert Smith in London