BREAKINGVIEWS-Bankers have new cause to fret about M&A loans

By Jonathan Guilford

NEW YORK, March 20 (Reuters Breakingviews) - There’s nothing worse than having to put your money where your mouth once was. During a market rout, bankers who stumped up financing for mergers and acquisitions can end up stuck with IOUs they intended to sell. JPMorgan JPM.N pressing pause on a key debt deal raises the specter of Wall Street facing another market blockage.

When banks help clients finance takeovers, they typically sell that exposure to a broad group of investors in a process known as syndication. The risk is that the market swings between inking a commitment and closing a transaction, leaving lenders holding paper they cannot shift.

JPMorgan's decision to freeze syndication of debt tied to software firm Qualtrics’ $7 billion purchase of Press Ganey, as reported by Bloomberg, raises such worries. This is not yet a “hung” deal, though: banks still have time to move their commitments. It’s nothing like 2022, when rising rates and plunging tech valuations left Wall Street holding nearly $80 billion of deal-related debt.

Even so, multiple factors have curbed appetites for M&A loans. The first is the fear that artificial intelligence will destroy software companies’ business models. Recent loan-market upsets are tech-related: debt backing Thoma Bravo-owned Conga's combination with a unit of PROS hung earlier this year, while Banco Santander SAN.MC kept a portion of another one of the private equity firm's deals, Bloomberg reported.

More broadly, buyout barons favor loans over the bond market. A post-pandemic binge of software deals, which reached $256 billion in 2021 according to Bain & Company, left loan investors overexposed to the industry.

The widening conflict with Iran is another reason to give debt buyers pause. Rising yields will affect any borrower seeking to shift a loan package. Just look at broadcaster Nexstar’s NXST.O $6 billion purchase of rival Tegna TGNA.N. Bank of America BAC.N and JPMorgan are rejigging a loan-and-bond financing deal, seeking investment-grade ratings for a bumped-up bond issue rather than accepting worse pricing on the loan portion, according to multiple sources familiar with the matter. If that transaction succeeds next week, it will be a hopeful bellwether that banks can manage through market ructions.

The third problem is a backlog of large deals. Roughly $116 billion in loans await syndication, according to one source, but this is dominated by mega-transactions. JPMorgan has launched an effort to sell debt backing the $55 billion buyout of Electronic Arts EA.O by a consortium led by Saudi Arabia's Public Investment Fund. But investors can only absorb so much paper at a time, which could squeeze the likes of Nexstar or Qualtrics. Waiting in the wings is the financing for Paramount Skydance's PSKY.O $111 billion swoop on Warner Bros Discovery WBD.O, where the buyer is hoping to secure an investment-grade rating for much of its debt to make it more palatable, sources say.

The latest bout of indigestion falls far short of previous blockages. Still, it will test Wall Street bankers' powers of persuasion.

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CONTEXT NEWS

A group of banks led by JPMorgan has paused the sale of $5.3 billion of debt tied to software maker Qualtrics’ purchase of analytics firm Press Ganey Forsta, Bloomberg reported on March 17.