- Morgan Stanley has invited banks to buy pieces of a $3 billion loan funding Royal Caribbean’s purchase of a 50% stake in Sandals Resort International. The facility has a 364-day maturity and prices at 1.125 percentage points over the Secured Overnight Financing Rate, and is expected to be refinanced later with longer-term bonds.
- It is one of a string of short-term buyout financings from the bank. This week Morgan Stanley and Société Générale were named as providers of a €22 billion, about $24.6 billion, bridge loan for Schneider Electric’s acquisition of PTC, a larger facility than the €16 billion to €17 billion previously reported as the requirement.
- The bank also provided a $4.5 billion short-term loan backing CH Robinson’s proposed $5.8 billion acquisition of RXO, was named with CIBC on financing for Wittington Investments $8.9 billion purchase of Boots, and was sole provider of a £2.4 billion bridge to Informa for its Clarion acquisition, carrying a one-year maturity with two six-month extension options.
- Taking only the disclosed loan amounts, that is roughly $35 billion of bridge commitments across four transactions, all short-dated and all intended to be termed out into bond markets later.
What Happened?
The lending reflects a surge in mergers and acquisitions, with dealmakers pursuing what could be a record year. Royal Caribbean, Informa and Morgan Stanley all declined to comment or did not respond.
Why It Matters?
Bridge lending concentrates a specific risk that is easy to miss while deals are closing smoothly. The bank commits the full amount now and distributes it later, either by syndicating to other lenders or by refinancing into bonds, and it holds the exposure in between. If credit markets deteriorate before that happens, the loans stay on the balance sheet, which is what the industry calls a hung bridge and is how underwriters took losses in previous cycles. Roughly $35 billion of such commitments written across days is a substantial warehouse, and the invitation to other banks to buy pieces of the Royal Caribbean facility shows the distribution process starting immediately, which is prudent and also tells you the bank does not wish to hold it. The refinancing environment is what makes the timing uncomfortable. Every one of these loans is designed to be replaced by longer-term bonds, into a market where the US 30-year Treasury yields 5.663%, the 10-year 5.303%, and French sovereign debt trades 140 basis points over German equivalents. Borrowers are locking in acquisitions now at bridge pricing and will refinance into the most expensive long-term debt market in two decades. For Schneider specifically, a €22 billion facility is larger than the €16 billion to €17 billion previously understood, and the shares have fallen further to 254.55. The pricing on the Royal Caribbean loan is the other detail worth noting. At 112.5 basis points over SOFR, it is a fraction of the 350 basis points over Euribor seen recently on speculative-grade European paper, reflecting a stronger credit but also the aggressive bank competition visible in the Cary auction, where lenders were expected to offer cut-rate pricing specifically to displace private credit firms. Banks are using balance sheet to win mandates, which compresses returns across leveraged lending and is the counterpart to the capital still flooding into private credit funds.
What Next?
Syndication of the Royal Caribbean loan is the immediate test of appetite among other banks for this paper. Watch when and at what spreads these bridges are refinanced into bonds, since that is where the economics are determined and where any deterioration would first appear. Morgan Stanley results will show the scale of commitments carried on balance sheet at quarter end. For the market generally, whether the merger wave continues at this pace into a rising rate environment is the question, and bridge lending volumes are a good leading indicator. Any sign of a transaction struggling to term out would change sentiment toward the whole cohort quickly.
Affected Tickers and Coins: MS, RCL, SU, PTC, GLE, CHRW, RXO, CM, INF
Source: Bloomberg
