Banks Are Left Holding Billions as Risky Loan Deals Collapse

A group of banks, led by Bank of Montreal, found themselves in a bind earlier this year when a $1.1 billion loan package for H.I.G. Capital’s acquisition of Converge Technology Solutions failed to attract enough buyers. The deal, meant to fund the creation of Pellera Technologies through a merger with Mainline Information Systems, hit a wall amid jittery markets. Investors, spooked by economic uncertainty and a sharp drop in loan prices, backed away, leaving banks holding a hefty debt load.

This wasn’t an isolated incident. At least six leveraged loan deals in the United States were pulled from syndication in early 2025, signaling a broader unease in the market for risky corporate debt. The episode underscores a growing challenge for banks and private equity firms navigating a financing landscape reshaped by higher interest rates and macroeconomic volatility.

The syndicated loan market, which fuels large-scale acquisitions and infrastructure projects, has grown rapidly, reaching $783 billion in 2025 and projected to hit $1.34 trillion by 2029. Yet, the same forces driving this expansion—demand for yield, private equity activity—also expose vulnerabilities when investor confidence wanes.

For readers unfamiliar with the intricacies of high finance, this situation boils down to a simple reality: banks took a big bet on a deal, and when the market turned sour, they were left holding the bag. The ripple effects could influence everything from corporate mergers to the stability of financial institutions.

The H.I.G. deal’s troubles trace back to a confluence of factors. A key trigger was a steep decline in leveraged loan prices, with average prices dropping to 95 cents on the dollar—the largest two-day slide in five years. This market turbulence, fueled by fears of a recession and new U.S. tariff policies, made investors wary of taking on riskier debt.

Higher interest rates also played a role. The Federal Reserve’s rate cuts in late 2024 brought the federal funds rate to 4.25%–4.50%, spurring a rebound in mergers and acquisitions. However, long-term rates, like the 10-year U.S. Treasury yield hovering near 5%, kept borrowing costs elevated. For deals like H.I.G.’s, which relied on large debt packages, these costs strained affordability.

Private equity firms, like H.I.G., often use leveraged buyouts to acquire companies, borrowing heavily against the target’s future earnings. When markets tighten, as they did in early 2025, finding buyers for this debt becomes a gamble. The Converge acquisition, valued at C$1.3 billion, was completed, but the stalled loan sale left banks exposed to ‘hung’ debt—loans they couldn’t offload.

Analysts point to broader trends in leveraged finance. The default rate for speculative-grade loans fell to 4.56% in 2024, with projections of 3.25%–3.75% in 2025. Yet, loan-financed companies face higher risks, with potential default rates climbing to 8.6% by mid-2025 if economic conditions deteriorate. This backdrop made investors hesitant to commit to H.I.G.’s deal.

Banks’ exposure to corporate debt defaults has been a recurring concern throughout history, from the railroad crisis of the 1870s to the Great Depression. Today, while banks hold stronger capital buffers than in past crises, a wave of defaults could still erode these reserves, particularly in less-regulated markets or among nonbank lenders, which now handle 40% of syndicated loans globally.

Nonbank financial institutions, such as private credit funds, have grown influential, holding 49% of global financial assets in 2023. These players often lend to riskier firms, relying on less stable funding. Their rise diversifies risk but also complicates oversight, as seen in the volatility surrounding deals like H.I.G.’s.

For borrowers, the stakes are equally high. Private equity-owned firms, laden with debt from leveraged buyouts, accounted for 11% of U.S. bankruptcies in 2024, leading to significant layoffs. Distressed debt exchanges, where companies swap old debt for new terms, have surged, but 37% of firms pursuing these deals still default later. This cycle of distress highlights the fragility of highly leveraged businesses.

The stalled H.I.G. loan sale is a warning sign for the leveraged finance market. While the syndicated loan market is poised for growth, competition between banks and private credit providers is intense, and investor caution could temper deal activity. Policymakers and financial institutions are watching closely, aware that systemic risks linger if defaults spike.

For everyday readers, this story connects to the broader economy. Struggles in corporate debt markets can slow business expansion, limit job creation, or even strain the financial system if losses mount. Yet, the resilience of the banking sector, bolstered by post-pandemic reforms, offers some reassurance that a full-blown crisis isn’t imminent.