The author is a Reuters Breakingviews columnist. The opinions expressed are her own.

By Karen Kwok

LONDON, April 17 (Reuters Breakingviews) - Leveraged-finance bankers have reasons to feel gloomy. U.S. President Donald Trump’s April 2 tariff announcement pushed up borrowing costs for indebted companies, putting new deals on the backburner. Still, the scars from the trade-war market turmoil probably won’t be as bad as those that lingered from 2022.

Three years ago, everyone from Goldman Sachs GS.N to Morgan Stanley MS.N and BNP Paribas BNPP.PA was collectively left holding roughly $80 billion of debt after interest rates shot up and credit markets freaked out. That stopped banks from offloading underwritten leveraged-finance deals to bond and loan markets within a few weeks or months, as they usually do. Examples of “hung” debt included $13 billion for Elon Musk’s Twitter takeover and 5 billion pounds ($6.6 billion) for the buyout of Wm Morrison Supermarkets by Clayton, Dubilier & Rice. It gummed up bank balance sheets, allowing private-credit rivals to steal a march.

The current moment bears similarities, including a rise in credit spreads, which refers to the extra return bond investors require for riskier debt. Spreads on the ICE BofA U.S. and European high-yield indexes have shot up to around 4% from under 3% in early March. Leveraged-finance deals have slowed to a trickle, while Citigroup and others are for now stuck with $2.2 billion of hung debt for the Apollo Global Management-backed takeover of auto parts group TI Fluid Systems by ABC Technologies, IFR News reported on Thursday.

The good news, however, is that the backlog of financing commitments is much smaller now than it was at the start of 2022, which reflects the much quieter 2024 M&A market compared with 2021. Leveraged-finance bankers told Breakingviews that current underwritten volumes are less than half the level of three years ago. Examples include the financing for Sycamore Partners’ $24 billion buyout of Walgreens Boots Alliance. So even if banks fail to sell any of the borrowings, the actual hung debt would be much smaller than in 2022.

And it’s possible that underwriters will be able to shift many of those loans and bonds on schedule anyway. Credit spreads have started falling in recent days and are still well below 2022’s peaks of around 6% in the United States and 6.5% in Europe. Key end-investors like credit funds, who often buy the debt, are not seeing scary outflows, according to one banker. And deals are still getting done. On April 3, for example, Morgan Stanley underwrote a $3.5 billion sub-investment grade loan for Brookfield Infrastructure’s acquisition of Colonial Pipeline, just one day after the U.S. tariff announcements. It also helps that banks have cooked up their own answers to private credit, giving them extra flexibility: JPMorgan JPM.N alone has earmarked $50 billion for a direct lending push, for example.

The main problem for leveraged-finance markets is more likely to be a slowdown in new deals, as companies and buyout firms sit on their hands amid trade-war uncertainty. That will hurt fees. Still, it’s better than the 2022-style problem of being hung out to dry by frozen credit markets.

Follow @karenkkwok on X

(Editing by Liam Proud and Oliver Taslic)

((For previous columns by the author, Reuters customers can click on KWOK/karen.kwok@thomsonreuters.com))