Goldman, BofA Cash In on Leveraged-Loan Frenzy

Surge in underwriting reflects companies’ moves to reprice and issue loans ahead of additional Fed rate hikes.

If yield is a drug, Wall Street’s working overtime to supply it.

Investors’ global reach for income is giving America’s largest banks their biggest surge in risky loan sales on record. Goldman Sachs Group Inc. and Bank of America Corp. on Tuesday joined JPMorgan Chase & Co. and Citigroup Inc. in reporting first-quarter gains of almost 40% in underwriting revenues.

“There’s a narcotic need for higher yield by debt investors, and the Street is going to create the deals to satisfy that,” said David Hendler, founder of Viola Risk Advisors. “Those with the better corporate-finance Rolodexes — Goldman Sachs, Bank of America, JPMorgan and Citigroup — are going to see the best deal flow because they’re connected to the mid-level companies that seek leveraged lending. It’s giving their earnings a boost."

The biggest U.S. banks are benefiting from the pace at which companies — propelled by expectations of more interest-rate hikes from the Federal Reserve — are repricing and issuing loans to capitalize on a demand for returns amid pervasive low yields globally. 

Banks arranged about $434 billion of leveraged loans in the first three months of the year, the most for a quarter in records going back to at least 1999, according to data compiled by Bloomberg. About half of the volume came from repricing loans.

Heightened leveraged-finance deal flow helped lift Goldman Sachs’s first-quarter underwriting revenue by 37%, the company said in a statement Tuesday, posing a reprieve from a rare shortfall in bond-trading sales that stunned Wall Street. For Bank of America, a “strong performance in leveraged finance” led to a 38% increase in debt underwriting for the period, CFO Paul Donofrio said on a conference call with analysts.

Industrywide Increase

Goldman Sachs reported net revenue from underwriting of $947 million, in part “reflecting an increase in industry-wide leveraged-finance activity,” according to the bank’s statement. The lender also reported revenue from fixed-income trading of $1.69 billion, falling short of analysts’ $2.03 billion estimate, because of weaker demand in commodities and currencies.

Bank of America, which reported a 29% increase in fixed-income trading revenue, said debt underwriting for the first quarter rose to $926 million.

JPMorgan last week reported a 34% surge in investment-banking revenue on higher debt- and equity-underwriting fees from strong issuance activity, while Citigroup posted a 39% jump in debt underwriting revenue.

Overall, leveraged loans returned 0.8% to debt investors in the period, compared with 2.7% for junk bonds, Bloomberg data show.



Bloomberg News


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