Financial institutions: On the funding back foot

by Alex Chambers

A fundamental change to the terms of banks’ financing is likely.

Email a Friend

All fields are compulsory

Your name:
Your email:

To include more than one recipient, please separate each email address with a semi-colon ';'

Recipient email(s):
Email yourself a copy?
Comments:

Add Your Comment

All comments are subject to editorial review.
All fields are compulsory

Your name:
Your email:
(will not appear)

You may email your comment to a friend
To include more than one recipient, please separate each email address with a semi-colon ';'

Recipient email(s):

Publish your name?
Receive email notification of new comments posted by other users?
Email yourself a copy?

Comments:

I have read and agree to the Terms and Conditions

To a certain extent, banks have always been about borrowing short-term and lending long but it is a matter of balance. Issuing longer-term debt and ensuring ample liquidity should be a high priority in the changed environment.

“You can see the fear in their eyes. There is a big lesson to be learnt here. I think a lot of financial institutions realize that, regardless of their assets, the mismatches of where they fund and what they own is bad and needs to change,” says a head of debt capital markets.

Has the failure of the interbank market created a new funding paradigm?

“It is not simply the drying up of the ABCP market which has done so much to drain markets of liquidity. The knock-on effect into ABS has been significant,” says Alan Patterson, head of capital management advisory at Citi. “To some extent this is also a question of restoring confidence in inter-bank liquidity – and I’m thinking in particular of the FRN market, which is nothing but longer-term interbank financing. Sooner or later bank treasurers will have to bite whatever bullet it is they have to bite and pay the market rate for term liquidity,”

According to Patterson, capital is not concerning people on the whole. There might be some banks at the margin that will raise capital in order to report stable ratios. Treasurers are more focused on liquidity because banks that go bust normally do so because of a lack of funds, not a lack of capital.

The hunt for liquidity might well mean more longer-term, fixed-rate bond issuance as the floating-rate sector is traditionally skewed to short dates. It is real money investors that have cash to put to work and they prefer the long-end of the yield curve.

There was a remarkable level of 10-year activity in the US market over the summer, including a lot from broker/dealers. Some $37 billion-worth of bonds priced in August compared with a paltry $12 billion in July.

The European market showed no such vigour but it was open. For instance GE Capital Corporation (which many regard as a semi-financial institution) printed €1 billion and £600 million of 60-year non-call 10-year subordinated paper at spreads equivalent to Euribor/Libor plus 100 basis points. The bonds’ terms almost exactly matched a trade the US firm conducted one year previously but then the Euribor/Libor spread was 60bp tighter. The key question issuers need to ask is whether these wider spreads are permanent or not.

Ahead of the game

Frank Kennedy, managing director at UBS, argues that issuers will still be reluctant to pay up by going too far down the yield curve for fixed-rate money. “The stuff we saw in the US, that 10-year issuance, was from investment banks. I figure they want to be ahead of the game, bolstering liquidity was key,” says Kennedy. “I think for most retail banks paying 75 basis points over Libor for 10-year issues is not on their agenda.”

In early September, fixed-rate spreads were substantially tighter than spreads for floating rate, in lower-tier-2 paper by 10/15 basis points for example – that market was very heavily affected by the disappearance of the structured investment vehicle bid.

Siddharth Prasad, head of FIG capital markets and financing at Merrill Lynch, is concerned that while banks continue to hoard liquidity the floating-rate note market will suffer as these investors were responsible for the bulk of the interest in a typical deal.

“We are talking to issuers – there is going to be a lot of balance sheet repairing done,” says James Garvey, head of investment-grade capital markets at Goldman Sachs. “There are a number of borrowers who are thinking: ‘I know I have to get some borrowing done – do I wait and hope spreads improve or do I just get out there?’ Even if the market contagion goes away the new-issue market will have a different tone. Spreads will be on the back foot because of supply pressures. Also there will be fears of an economic downturn.”

Bankers point to the importance of levered money in recent years. With hedge funds, SIVs and banks sidelined. The proposition is very different because issuers are left with only real money investors and these have a view on value. It signals sanity returning to primary and secondary markets.

Prasad says, “It’s a fundamental repricing of credit. But putting things into context, for perpetual product we are back to where we were roughly five years ago but that is still inside the all-time wides.”

The world’s largest banks 2008

FX poll 2008:

Financial institutions: On the funding back foot

A fundamental change to the terms of banks’ financing is likely.

Email a Friend

Add Your Comment

Other credit markets stories

World's largest banks 2008 - Global bank rankings: Top 20 global (free to access)

The world’s largest banks 2008, with data from Moody's

Commodities debate: Refining value from raw materials

Private banking and wealth management survey 2008: The benchmark annual survey of the wealth management industry

Ukraine: MHP feeds appetite for farming

Meinl restructuring sparks share dilution fears

FX poll 2008: Global FX market continues dramatic growth

The world’s largest banks 2008, with data from Moody's

World's largest banks 2008 - Global bank rankings: Top 20 global (free to access)

The world's largest banks in 2006

Private banking and wealth management survey 2008: The benchmark annual survey of the wealth management industry

Latest Issue