Banks are braced for losses on a £1bn bond and mortgage deal backing on-line UK playing firm 888’s takeover of rival William Hill’s operations outdoors the US, marking the newest debt sale to go awry in unstable markets.
Investment banks have incurred steep losses on a string of latest debt gross sales backing riskier company acquisitions because the offers unravel within the face of rising rates of interest and more and more cautious traders.
In these offers, banks initially underwrite the debt after which promote it on to specialist funds, that means the underwriters can e book losses if traders demand larger yields than initially anticipated.
JPMorgan and Morgan Stanley, the 2 banks main 888’s bond and mortgage deal, have been scheduled to wrap up the debt sale this week. But JPMorgan introduced on Friday that it could now be “delayed until mid next week”.
The US funding financial institution cited a “delay” in finalising the documentation across the US greenback mortgage portion of the deal, together with the approaching July 4th vacation.
However, bond and mortgage fund managers who have been approached to purchase the debt stated tepid demand had hit the sale, with traders not even tempted by double-digit yields. The banks started advertising and marketing the deal at a yield of round 10 per cent, however will now have to cost it even larger.
JPMorgan and Morgan Stanley declined to remark.
888 is shopping for William Hill’s operations outdoors the US, which embrace 1,500 UK betting retailers and on-line operations in markets resembling Italy and Spain, from on line casino operator Caesars.
Rising inflation and the prospect of upper rate of interest rises have sapped traders’ urge for food for threat, with European high-yield bond indices dropping round 15 per cent this yr.
On high of the stresses in debt markets, the UK authorities’s evaluate into the 2005 Gambling Act, which is predicted to clamp down on drawback playing, can also be weighing on 888’s debt deal.
“It’s impossible to take a view on this credit before the government white paper is out,” stated one mortgage fund supervisor.
The UK authorities coverage doc, due inside days, will mark the most important shake-up of the business in 17 years. Culture secretary Nadine Dorries is about to advocate a collection of measures, together with a most stake of between £2 and £5 for on-line casinos, stricter checks on prospects’ revenue ranges and a ban on free bets and VIP packages for drawback gamblers.
But the sector stays unsure over the main points, significantly whether or not the federal government will go for more durable curbs, resembling a brand new levy on playing income to fund public well being initiatives. “There’ll be a fair amount of pain, we just don’t know exactly where it’s going to come,” stated one playing business govt.
When banks battle to promote underwritten offers, they’ve to supply the debt to traders at a reduction to face worth, leaving them with a loss. JPMorgan started advertising and marketing 888’s deal at round 92-93 cents on the greenback, however fund managers count on it to finally shut at a fair steeper low cost.
The group of banks underwriting the deal — which additionally consists of Mediobanca and Barclays — have already determined to carry round £760mn of 888’s debt on steadiness sheet, fairly than attempting to promote it to traders.
The playing deal is the newest leveraged buyout to trigger ache for funding banks, which underwrote debt packages earlier than a market downturn crimped demand for riskier debt.
A bunch of banks led by Goldman Sachs positioned a £1bn bond backing the takeover of UK grocery store Morrisons at a steep low cost in May. These banks are nonetheless sitting on billions of kilos in unsold loans backing the deal, which they’re anticipated to incur additional losses on.
European high-yield company bond issuance has dropped strongly this yr in these tough circumstances, with Refinitiv information exhibiting proceeds down 77 per cent in comparison with the primary half of 2021, when many corporations rushed to lock in beneficial rates of interest in benign markets.
“It’s one of those that in a good market would get done, but need to come with some concession,” stated one bond investor, whose workforce handed on 888’s deal. “In a bad market, [it is] much harder.”
