A consortium of banks led by UBS and Deutsche Bank reportedly incurred a $200 million loss on a corporate acquisition involving bridge financing.
Bridge loans play an important role in the completion of individual transactions in takeovers and mergers, and are an integral part of investment banking typically generating a high percentage of the fees and commissions earned in those business units.
But with the recent market turmoil, the liabilities assumed in such deals have often proved a boomerang for banks as sales falter and valuation losses weigh on profits. This has been demonstrated by the results of Wall Street banks in recent weeks.
Loss-Making Business
With the purchase of Cornerstone Building Brands by the private equity firm Clayton Dubilier & Rice (CD&R), a banking group led by Deutsche Bank and UBS, is said to have incurred a valuation loss of $200 million, «Bloomberg» (behind paywall) reported on Monday. The consortium is said to include: Barclays, BNP Paribas, Royal Bank of Canada, Société Générale, Goldman Sachs, Natixis, and Jefferies, according to the report.
CD&R had agreed to buy the remaining 51 percent of Cornerstone for $5.8 billion last March. In the process, the banking group agreed to provide $1.675 billion to finance the deal. That figure included $950 million in secured debt from Cornerstone's main operating company and $725 million in «payment in kind» notes (PIK) issued by a holding company.
Discount to Par
Most of the loss came from the risky PIK notes, which the banks sold back to CD&R at a substantial discount to face value, according to the sources.
The PIK notes, which are highly subordinated and whose interest is paid in additional debt rather than cash, were deemed too risky to sell to investors in the current low-risk climate. The banks would have preferred to take the losses from the sale to CD&R rather than keep them on the books and finance them with their cash.
Valuation discounts of around 10 percent had also been accepted on the sale of the secured part of the financing. The losses incurred exceeded the fees generated for underwriting the debt by several times, «Bloomberg» said citing people familiar with the issue.