Private equity's lifeline was cut off to start 2016. And it's hurting Wall Street banks, too, which are losing lending business to European competitors.
For U.S. private equity firms, it means fewer deals, and at a higher cost. For investors, it cuts the likelihood that they'll be able to reap returns on deals where companies are taken private. And for banks, many of which forecast disappointing earnings reports next month, it's one more factor going against them in what has been a painful 2016.
Instead of assigning the blame to busted deals and bankruptcies, several Wall Street sources pointed toward plunging commodity prices as a source of falling high-yield deals. Some noted that pessimistic economic growth expectations have continued to spook investors in riskier debt.
But ugliness in the energy sector cannot be ignored. BlackRock revealed in a regulatory filing this week that it plans to launch an exchange-traded fund that will invest in junk bonds but exclude energy companies' debt, a sign of how unattractive the sector has become to investors.
"Energy continues to be out of favor," said the head of leveraged finance at one major U.S. bank, who asked to not be quoted.
As of Monday, a paltry 53 high-yield bond deals were marketed so far this quarter in the U.S., according to financial services data firm Dealogic, amounting to just $33.5 billion worth of issuance.
With the exception of one period — the third quarter of 2011, when 51 high-yield deals were marketed — it's the worst single quarter on record since the global financial crisis. It's the third straight quarter the number of marketed high-yield deals fell below 60, a first since the crisis.
Worse still for Wall Street, U.S. banks' share of revenue on leveraged lending, which fell to 55 percent at the end of last week, is the lowest year-to-date share on record, according to Dealogic. U.S. banks' average share of the market here has been 63 percent over the last decade.
When 2016 started, banks were already holding loans they couldn't place, said Richard Farley, chair of the leveraged finance group at law firm Kramer Levin. That was the result of a handful of big private equity deals' loans not getting the placement they needed, and it created a backlog at big banks.
"There are green shoots, as we speak," Farley said. "It's directly tied to oil prices."
But international monetary policy surprises haven't helped U.S. banks, either.
The European Central Bank announced in mid-March that it would buy more corporate bonds, which created immediate demand for more paper in the market. As a result, major corporations that had been issuing less debt, or selling it in other places like the U.S., returned to European markets with force.
This, too, came at an inconvenient time for American banks. Dealogic data show European banks commanding an advantage over U.S. banks that's larger than at any point dating back to 2011.
Another banker who regularly works on private equity deals, and asked to not be named, said that spreads on high-yield debt have returned to the high single digits this month, after rising to double digits to begin 2016 before moving down. It's a sign of optimism that's welcome in the debt space, which also saw capital outflows from high-yield funds reverse in recent weeks.
"The capital markets were closed in 2015, heading into 2016," said Justin Fuller, senior director at Fitch Ratings. "It's a very competitive space."