A quick note before the day starts: Both the WSJ and Bloomberg have been noticing the big slug of cheap bank debt due to be refinanced soon not so cheaply:
U.S. and European banks, already burdened by losses and concerns about their financial health, face a new challenge: paying off hundreds of billions of dollars of debt coming due.
At issue are so-called floating-rate notes — securities used heavily by banks in 2006 to borrow money. A big chunk of those notes, which typically mature in two years, will come due over the next year or so, at a time when banks are struggling to raise fresh funds. That’s forcing banks to sell assets, compete heavily for deposits and issue expensive new debt.
The crunch will begin next month, when some $95 billion in floating-rate notes mature. J.P. Morgan Chase & Co. analyst Alex Roever estimates that financial institutions will have to pay off at least $787 billion in floating-rate notes and other medium-term obligations before the end of 2009. That’s about 43% more than they had to redeem in the previous 16 months.
Its another log on the fire of sector undesirability — for purely fundamental reasons. The business model is simply not what it once was.
And as we have learned, it really never was as advertised.
More at the links below . . .
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Sources:
New Credit Hurdle Looms for Banks
CARRICK MOLLENKAMP
WSJ August 27, 2008; Page A1
http://online.wsj.com/article/SB121978478790274083.html
Merrill, Wachovia Hit With Record Refinancing Bill
Pierre Paulden
Bloomberg, Aug. 26 2008
http://www.bloomberg.com/apps/news?pid=20601087&sid=aQLwsxFqjNQ0&
Honestly, this seems like a total nonissue to me. The articles didn’t put the dollar amounts into perspective in terms of the overall debt of the institutions because it’s actually a pretty small percentage of the total. Also, the WSJ article talks about the spread over LIBOR but failed to mention that LIBOR is a lot lower than where it was two years ago, so at the spreads mentioned in the WSJ, they’re actually paying lower rates than they were two years ago. You don’t need to look far to find manifestations of the crisis these days. I’m dissapointed that some people feel the need to fabricate a crisis like this.
NIck:
I have this great new business model for something I call ‘banking’. Basically, I borrow at 12% from the Saudis by issuing something called ‘preferreds’. Then I lend at 6%. Pretty cool, huh? A lot of the lending is to people with declining asset values. Brilliant, eh? Wait, here’s the best bit, I am highly leveraged.
So as you can see the debt rollovers are NOT a problem…..
(I hope people have their sarcasm detectors on today)
NIck:
I have this great new business model for something I call ‘banking’. Basically, I borrow at 12% from the Saudis by issuing something called ‘preferreds’. Then I lend at 6%. Pretty cool, huh? A lot of the lending is to people with declining asset values. Brilliant, eh? Wait, here’s the best bit, I am highly leveraged.
So as you can see the debt rollovers are NOT a problem…..
(I hope people have their sarcasm detectors on today)
Dear Sarcasmo:
My point is that this is not the problem area. Not sure why you made up those numbers. Let’s put some real numbers on this: their borrowing cost for this rollover, although 200 bps above LIBOR (WSJ #s) is still only about 4.8%. Back in ’06, LIBOR was at 5.4%, so flat to LIBOR was actually higher than where we are now. Also, I think rates on mortgages kept on balance sheet are now closer to 7.5%, but let’s take Freddie’s current rate of 6.5%. Again, you’re leaving out the fact that the rollover percentage is small compared to the amount of debt outstanding. So can they rollover a small (I didn’t calc, but let’s say less than 5%) percent of their debt at lower rates than where they were two years ago with mortgage rates higher now (also leaving aside the fact that resi mortgage lending is not 100% of what they do and the fact that banks generally charge very low rates on deposits which is also a big part of funding)? Yeah, I don’t think that’ll be the problem. The big problem is all of the legacy credit losses from years of horrible underwriting. Why the need to create a new problem when there are plenty of real issues?
I have this great new business model for something I call ‘banking’. Basically, I borrow at 12% from the Saudis by issuing something called ‘preferreds’. Then I lend at 6%. Pretty cool, huh? A lot of the lending is to people with declining asset values. Brilliant, eh? Wait, here’s the best bit, I am highly leveraged.
Yeah, but you make up for it with volume.
Nick,
I didn’t make up the numbers. They are simply typical of the yields of the preferred offerings of several banks in the last few months. These include WaMu, Key Bank, Fifth Third and others.
You might be right about low rates for refinancing – but that’s only if you are in fact the CFO of Captain Sensible’s Federal Savings Bank, based in Upper Leafville, a small community with 0% unemployment, entirely populated by millionaires and trust fund babies. But if you are running a typical highly leveraged bank that holds Alt-A or “Prime” jumbo mortgage paper in SoCal you are not going to get those rates.
For more information on this problem, I refer any interested reader to this article on “Dead Banks Walking”. Wait until you see the commercial mortgage mess. You ain’t seen nothing yet!
http://www.minyanville.com/articles/fnm-fre-MER-LEH-ms-bac/index/a/18657
All the financial pundits have talked about a “systemic crisis” shaking the world financial system. Correct me if I am wrong.. I think it is upon us here and now..
@Nick,
Thanks to the internet anyone with a connection and a brain can find out how banks work and how naughty they have been.
It is no longer an infathomable mystery carried out by dark suited men within marble buildings of intimidating neoclassical architecture.
We know that, to paraphrase John Kenneth Galbraith, the whole banking edifice hangs on the single silken thread that everybody will not come for their money at the same time or with undue haste.
Nick, we don’t trust them anymore!
Leftback, I agree that the regionals are in trouble. The banks/brokers mentioned in the Journal article were ones like Merrill, Morgan Stanley, Goldman and Wells Fargo. For those guys $5 billion is less than 2% of debt. I’m pretty sure they’ll be able to roll that at reasonable rates. Remember the article talked about senior debt, not preferreds. Preferreds are subordinated, hence the higher rates. Also, banks are limited by the Fed as to how much of their funding can come from that source. Again, my point is not that they’re not under stress. It’s that I doubt any of the big guys will have trouble rolling their short-term senior debt; and even if they can’t or just don’t like the rates, it’s not going to be a big blow to them. I’m not saying the equity of the banks has any value, I was solely focusing on their ability/need to roll short-term senior debt, which the article blew all out of proportion.
And Simon, if you’re serious about your post, then I assume you don’t have a bank account and keep all of your money in your mattress?