US banks take hit on leveraged loans as deals slump, rates rise

US 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, Reuters reports.

Bank of America BAC.N disclosed on Monday it is reducing its leveraged loan exposure from the $300 million mark, Citigroup Inc wrote down $126 million in the second quarter and Wells Fargo & Co WFC.N took a $107 million writedown due to widening of credit spreads.

Leveraged loans are usually taken out by companies that have high levels of debt, usually with non-investment grade credit ratings. They tend to be used by 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 realised loss if a loan on their books turns sour, analysts say.

“The market turmoil and abrupt slowdown in the second quarter sparked a downturn in the leveraged finance markets, causing a number of the deals across various market participants to get marked down,” Bank of America’s chief financial officer, Alastair Borthwick, said on an earnings call on Monday.

Citigroup CFO Mark Mason said last week the leveraged finance segment is under a considerable amount of pressure in this environment.

“We’re not a big player here. We did take a writedown in the quarter, about $126 million,” he said.

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