U.S. banks have started taking a hit on their leveraged loans’ exposure as the outlook for dealmaking turns sour amid rising interest rates; and extreme market volatility caused by the Russian invasion of Ukraine. Bank of America is reducing its leveraged loan exposure from the $300 million mark; Thereafter, Citigroup Inc (C.N) wrote down $126 million in the second quarter; and Wells Fargo & Co (WFC.N) took a $107 million write-down due to a widening of credit spreads.
Leveraged loans are usually out by companies that have high levels of debt, usually with non-investment grade credit ratings. However, they tend use private equity firms as a way to fund acquisitions of such companies.
A widening of the credit spread means mark-to-market losses for banks or even worse a realized loss if a loan on their books turns sour, analysts say. Citigroup CFO Mark Mason said the leveraged finance segment is under a considerable amount of pressure in this environment. Also,Wells Fargo said on Friday its investment banking fees declined, reflecting lower market activity; and the $107 million writedown on “unfunded leveraged finance commitments” due to the market spread widening.
Inflation exacerbated by supply-chain issues and geopolitical developments is weighing on credit profiles, along with slower economic growth; and tightening monetary policy, said Lyuba Petrova, head of U.S. leveraged finance at Fitch Ratings. Therein, leveraged loans fell to $737 million in the first half of the year; down from $883 million a year ago, data from Dealogic shows. Also, the U.S. central bank has been trying curb a relentless surge in prices and has committed to a “soft landing.”