The leveraged debt market has been deteriorating, but that hasn't stopped the big banks from stepping up to the plate this year with giant credit packages that rating agencies deem below investment grade.
Distressed investors, who typically have an appetite for sub-investment-grade debt, are increasingly withdrawing their funds amid plunging oil prices and concerns surrounding the Federal Reserve's interest rate hike.
Barclays (BCS) is the latest among the major banks touting such debt, as it plans to unveil a $780 million leveraged-loan package Thursday that will fund Mattress Firm's (MFRM) acquisition of bed maker Sleepy's, a person close to the deal said.
Mattress Firm announced Monday that the waiting period, governed by the Hart-Scott-Rodino Antitrust Improvements Act of 1976, has expired and that it's now set to close the acquisition of all the outstanding equity of Sleepy's parent, HMK Mattress Holdings.
Barclays investment bankers are set to pitch $780 million of Mattress Firm debt that will support the deal, the person said, who spoke on the condition of anonymity because talks are private.
While pricing terms of the deal are uncertain, the loan will likely include a five-year maturity, which is roughly two years shorter than a standard leveraged loan, he said.
The narrow timeframe is a lender-friendly provision, and indicative of how investors are increasingly pulling out of speculative credit markets, which has forced issuers to offer sweeter deal terms to find sufficient demand.
One measure of the reeling market is the waning issuance of collateralized loan obligations, or CLOs, which are essentially warehouses of leveraged debt (defined as having a S&P credit rating below "BBB"). Investment banks often must rely on CLOs to offload the leveraged credit they underwrite.
According to Leveraged Commentary & Data, a division of S&P, CLO issuance is likely to dry up to just over $70 billion in 2016, a sharp decline from the market's more than $120 billion peak in 2014.
Goldman Sachs, for instance, has reportedly reacted to the pullback by trimming 10% of its high-yield staff.
Goldman and investment banking divisions of giants like Barclays, Credit Suisse (CS), Morgan Stanley (MS), among others, are regular underwriters of debt that is deemed high yield or leveraged
For investment bankers, it's generally a near riskless venture, as they are enthusiastic to compete for multi-million dollar fees by marketing and structuring debt packages for companies like Mattress Firm. The general thought is, if the borrowers ultimately cannot make good on their debt servicing, it's no longer the investment bankers' concern.
However, that is not usually the case with M&A and leveraged buyout deals. As opposed to opportunistic deals like a debt refinancing or dividend recapitalization, deals backing mergers such as Mattress Firm's typically must be held on the bankers' books if the market doesn't want it.
This happened to Morgan Stanley in its December efforts to offload $700 million in leveraged credit backing the $925 million sale of two eBay (EBAY) businesses to private-equity firms Sterling Partners and Permira, which was inked last July.
After missing its initial October deadlines for signatures on the debt, Morgan Stanley found itself scrambling to offload the debt of one of eBay's spinoffs, adding lender-friendly revisions such as a substantially higher interest rate. But by December, distressed investors were pulling their money out of leveraged lending funds amid Federal Reserve rate-hike speculation, sending the market into a tailspin.
Goldman has already jumped back into the market this year, and is the lead underwriter for a $1.5 billion loan backing the buyout of tech giant Solar Winds by private equity firms Silver Lake and Thoma Bravo, according to a person close to the deal. The debt package was launched Wednesday and Credit Suisse, Nomura and Macquarie are secondary investment banks on the deal.