**Lenders Face $2.2 Billion Debt from Canadian Auto Parts Acquisition**
Lenders are currently burdened with $2.2 billion in debt following the acquisition of a Canadian auto parts company, marking the first significant financing challenge for Wall Street since the recent onset of a global trade war initiated by the Trump administration. Typically, when a merger or acquisition is announced, the involved companies quickly secure debt from banks, which then market these financial products to investors in the leveraged loan and high-yield bond sectors. However, on Tuesday, ABC Technologies Holdings Inc. finalized its acquisition of TI Fluid Systems Plc before the banks could successfully sell the associated bonds and loans, according to sources familiar with the situation. This scenario has resulted in the debt being classified as “hung.”
A consortium of banks, including Citigroup Inc. and JPMorgan Chase & Co., will now need to utilize their own balance sheets to finance the acquisition backed by Apollo Global Management Inc. Representatives from Citigroup, JPMorgan, Apollo, and TI Fluid Systems declined to comment on the matter. When banks hold a significant amount of hung debt, their capacity to underwrite additional high-risk deals may be restricted due to capital reserve requirements.
The last time Wall Street faced a similar predicament, banks were left with approximately $40 billion in bonds and loans that depreciated in value as investor interest waned. Although the current deal pipeline is considerably less robust than in 2022, when banks were similarly burdened with junk-debt financing, several transactions were initiated prior to President Trump’s announcement of extensive tariffs on April 2. The resulting market volatility effectively halted new bond and loan sales for companies with lower credit ratings.
Wall Street banks aimed to raise around $1.3 billion in high-yield bonds alongside a $900 million leveraged loan for ABC Technologies. This acquisition marks the second instance this year where a deal closed without the debt being sold; in February, banks were left holding part of a $750 million debt package for Lakeview Farms’ acquisition of Noosa Yoghurt.
Following a lender call on March 25, banks initiated the leveraged loan sale at a rate of 5.5 percentage points above the Secured Overnight Financing Rate, with investors offered a discount between 95 to 96 cents on the dollar. However, investor interest waned due to concerns regarding the impact of tariffs on both Toronto-based ABC and Oxford, England-based TI Fluid Systems.
While the banks may not be permanently stuck with this debt, the rapidly changing tariff policies and retaliatory measures from affected nations suggest that resolution will take time. Options for the banks include selling the debt to private credit firms, amending the terms of the debt deal to attract risk-averse investors, or waiting for market volatility to decrease, allowing bond and loan buyers to engage in new transactions.
**FAQ**
**What does it mean for banks to have “hung” debt?**
“Hung” debt refers to loans or bonds that banks are unable to sell to investors after a merger or acquisition, forcing them to hold the debt on their balance sheets, which can limit their ability to engage in new financing deals.
