Banks Coming Up With More Pitches To Sell LBO Loans

Banks are coming up with new ways to sell and clear their books of loans, especially those made to finance leveraged buyouts.

These loans, made to companies for the purpose financing deals or for other corporate purposes, usually are paid off first in case of a default and have a floating interest rate.

With more than $10 billion in loans left to sell, bankers are taking to some new pitches and tried-and-tested tactics to attract buyers. While there is little trouble selling loans made by double-B issuers, companies with lower ratings and part of buyouts struck with high valuations early summer face sharp rejections from buyers.

A handful of these loans, including that to BJ's Wholesale Club Inc. (BJ), Blackboard Inc. (BBBB) and the privately-owned GoDaddy Group Inc. are in the market trying to find buyers and the right price that will attract investors to these loans that back highly leveraged deals with terms that offer little to no protection for investors.

Already, many of the usual loan-focused funds and retail investors have walked away, unwilling to take on such risk at a time when global markets are stressed. Also, the primary attraction that loans offered over the past year was protection against the possibility of rising rates.

"While these companies are doing OK, when you lever them up in uncertain economic times, you have less cushion for a rainy day," said George Goudelias, a senior portfolio manager who co-manages a $4 billion, loan-focused fund at Seix Investment Advisors.

Further, with the Federal Reserve Chairman Ben Bernanke indicating that interest rates would stay near the current lows until mid 2013, many investors see little reason to buy loans.

"We have to 'repitch' the asset class," said Robert Schleusner, cohead of global leveraged finance at Bank of America Merrill Lynch. "It's not a turn on the dime pitch."

The new selling point: yield.

These riskier loans now offer an average of 8% to 9% yield, up from the 6% level in May and closer to average yield on high-yield bonds. Bankers hope that high-yield funds and equity investors looking to add safer options would consider loans. In addition to yield, loans offer the possibility of being paid at par. But that alone may not be enough.

"We need to find additional investors who are receptive to loans, and adjust pricing and structure accordingly," said John Cokinos, head of leveraged finance capital markets and syndicate at Bank of America Merrill Lynch.

The price on BJ's Wholesale's first-lien term loan was cut to 95 cents on the dollar Friday ahead of its pricing later in the afternoon. The $1.075 billion, seven-year loan with light terms of protection had started with a price of 97.5 and larger size.

"Loan investors want a lot of discount to originate new issue," Schleusner said.

As bookrunners keep knocking off the price, it is likely to eat into the fees that banks make from these deals, which typically ranges in the 2% to 3% range. But at this point, banks, which saw a record-level of high-yield issuance in the first half of the year, don't seem too worried about that prospect. Rather, their focus is to find buyers of this risk.

"We try not to hold these assets on our books.... We just have to find the right level to sell," Cokinos said.

For some investors, the right price might make all the difference.

"We are looking at it," said James Keenan, head of leveraged finance portfolios and investments at BlackRock.

"Everything is risk-reward adjusted," he said.

-By Prabha Natarajan, Dow Jones Newswires; 212-416-2468; [e-mail]