Transactional debt financing is largely on pause right now – especially anything below investment grade, which is largely where financials sponsors play. Moelis reported earnings yesterday but more interesting than its earnings were Ken Moelis’ comments on the transactional debt markets. These are my highlights from the call:
“…the debt market is not fully operational due to significant transactional loans that are mispriced for the current market and need to move through the system. As a result, the market conditions that existed in Q2 have continued into the beginning of Q3.”
“The debt markets are just not functioning right now. And I think that’s a function of, there’s a bunch of loans that are being marked down. It’s a little bit like the retailers are doing. I think the product that was put on the shelves 3, 4, 5 months ago isn’t appropriate for the market today. It’s going to be discounted and cleared that will happen quickly. And then I think I believe we’ll be back to a new financing market. But right now, I think the sponsor community wants to transact. They just can’t transact in the capitalizations that they want to.”
“The banks are strong. The nonbank market is strong. But right now, the nonbank market is focused on transactional loans that the banks have and they’re being offered at the clearance aisle, 10%, 20% off. And I just think that’s just a natural, yes, I think that those are going to get cleared out because they’re onetime, and then we will reset and the banks will be in business.”