Twitter LBO Offers Latest Headache for Depleted Credit Markets

Elon Musk’s revived deal for Twitter Inc. is only adding to the strain.

The $13 billion debt financing for Twitter -- the biggest part of roughly $51 billion of risky committed debt.  (AFP)

It's already bleak for Wall Street banks that struggled to sell risky debt to fund leveraged buyouts. Elon Musk's revived deal for Twitter Inc. is only adding to the strain.

Banks have already been saddled with losses of about $600 million for the buyout of Citrix Systems Inc. and are still stuck with $6.5 billion of debt they couldn't sell. They also had to shelve a $3.9 billion deal for Brightspeed after investors balked at the offer -- and are expected to soon fund the buyout of Nielsen Holdings, and possibly even Tenneco Inc.

With that in mind, and with little else in the way of imminent deals, Twitter is likely to remain center stage for credit markets in the coming week.

Bond Deals Get Pulled During Critical Month for Global Sales

The $13 billion debt financing for Twitter -- the biggest part of roughly $51 billion of risky committed debt that banks have to offload, according to Deutsche Bank AG estimates -- would be a test for a leveraged-finance market that has been shaken in recent months.

A Delaware judge halted a court case against Musk over his $44 billion purchase of Twitter, giving the parties more time to complete the deal. If the transaction isn't done by 5 p.m. on Oct. 28, a new trial date will be set for November.

With the timing unclear, markets will focus on the overdue $2.25 billion in financing to help fund Latam Airlines Group SA's exit from bankruptcy. Terms have been sweetened, and timing remains unclear.

“The outlook for new issue supply is pretty bleak,” said Michael Chang, senior portfolio manager for high-yield credit at Vanguard. The amount of debt that still resides on bank balance sheets is likely to depress near-term new underwriting activity through the beginning of next year, he said.

Primary Drought

It's also expected to be a light week in the US investment-grade bond market. High-grade borrowers are expected to sell $15 billion of debt following Monday's US bond-market holiday.

Issuers paid an “eyebrow-raising” 46 basis points in new issue concessions on Thursday -- nearly 4 times the year-to-date average, according to Bloomberg credit strategist Brian Smith.

Most companies are approaching earnings blackout periods, with Yankee issuance expected to account for the majority of volume next week. JP Morgan Chase & Co. and Citigroup Inc. will kick off bank earnings on Friday, and debt offerings could follow.

High-grade markets are feeling the pressure as a strong US labor market leaves the Federal Reserve on course to stay aggressive in its fight against inflation. Across credit, money managers will closely watch a reading of US consumer prices on Thursday.

“Expectations are that it should start to move in the right direction,” said Arvind Narayanan, senior portfolio manager and co-head of investment-grade credit at Vanguard. “We will be looking for confirmation of that.”

Investors withdrew $3.54 billion from US investment-grade bond funds in the week ended Oct. 5, following $10.3 billion of withdrawals in the prior period, according to Refinitiv Lipper data. High-yield funds, meanwhile, lured in about $1.87 billion, which could help support junk-bond prices next week with fresh capital for fund managers to put to work.