Leading banks on Wall Street will lose $600 million in underwriting deals for Citrix Systems Inc. sale after repricing of risk assets. Months of hard work ultimately resulted in the banks getting enough demand to sell the debt.
Banks led by Goldman Sachs, Bank of America, and Credit Suisse Group AG could finally get enough demand to sell $8.55 billion in debt out of the total $15 billion package via loan and bond markets. In January, the investors demanded higher yields than what the group of underwriters had promised to PE firms Elliot Investment Management and Vista Equity Partners, resulting in banks taking a hit.
The damage could have been greater had the underwriters sold the entire debt package to money managers, where losses could have exceeded $ 1 billion instead of $ 600 million.
The losses are estimated based on calculations done by Bloomberg and other market intermediaries conversant with the deal. The estimates are conservative, and the final figure depends on the flexibility received by Banks in its original commitment to underwriting and the fees it was supposed to earn.
Most of the losses arose from the financing’s $ 4 billion secured bond. After discounting 83.6 cents on the dollar for a yield of 10% and adjusting the underwriting fees, the bond’s losses exceeded $500 million. The balance of the $4.55 billion loans was split between the dollar and equivalent euro loan for $ 4.05 billion and $ 500 million, respectively. They were sold at 91 cents discount. Here, the losses amounted to approximately $ 100 million.
Deal Delay
When Elliot and Vista announced in January about Citrix buying, the deal was a coup for underwriters. It was one of the largest debt financing packages seen in years. The Russia-Ukraine war however, turned things around with inflation, recession fears, and rising interest rates reshaping the global environment.
The banks tweaked the debt structure in an effort to drum up demand and sell the debt in April or May. This did not materialize, and it was deferred to July. The market volatility made the banks wait till Labor Day.
The banks then made a pre-marketing effort with a new deal structure in August to make the investors interested before the official launch. They decided to hold a portion of the loan on their balance sheets as there were chances of steep losses.
Banks are aware of the financial setback hovering around because of Citrix and many other similar deals. Six major banks have already estimated notional losses of $1.3 billion in the US in the second quarter.
Keeping around 40% of the total debt package on their balance sheets – $2.5 billion loan and $4 billion as second lien debt is a double edge sword for banks. The banks plan to move these debt commitments faster and use the capacity to make fresh deals and earn fees.
