Barclays Plc, Credit Suisse Group AG, Deutsche Bank AG, UBS AG and others stuck with a pile of high-risk debt they’ve been unable sell can breathe easier after a rebound in the leveraged loan market.
Loans in Europe have staged a record rally since the end of March. That’s lessening the pain for banks that agreed to provide debt for M&A deals before the Covid-19 pandemic struck. They’d had to record a loss in the value of those loans in their first quarter results as prices slumped.
A combination of the rising market and hedges against their exposure could reduce the pressure to sell the debt to third-party investors. Bank executives acknowledge that the continuing volatility in markets means they are not out of the woods yet. But in comparison with their position during the financial crisis, banks are now better capitalised and have a fraction of the exposure.
“I think the risk of levered loan markets that we may have seen about a month ago has definitely subsided and we feel very comfortable with the book that we have,” Barclays’ chief executive officer Jes Staley said on an investor call last week.
Barclays reported a 320mn pound ($398mn) mark-to-market loss on leveraged loans in the first quarter, partly offset by a 275mn pound gain from hedges.
Credit Suisse recorded a first-quarter $293mn markdown from its leveraged loan exposure. UBS marked down $183mn across three divisions including leveraged capital markets, which it said was fully offset by hedging gains.
Deutsche Bank, which is arranging some of the same deals and had 4.1bn euros of leveraged loan commitments at end-March, said hedging almost entirely offset its markdown. More European banks are releasing earnings this week.Spokespeople for Credit Suisse, Deutsche Bank and UBS declined to comment for this article. Barclays did not respond to a request for comment.
But while banks can take comfort from the rebound and the protection of their hedges, they could still face a long delay in selling their debt stock.
They’re waiting to offload more than $13bn to investors in Europe, including part of the 10.25bn euro funding for Thyssenkrupp AG’s elevators unit. Some European underwriters are also sitting on deals destined for the US market.
Loan and bond issuance is starting to revive in Europe but so far chiefly for stronger companies willing to pay up. The M&A deals structured in the bullish pre-Covid conditions are unlikely to suit lenders’ current needs in terms of pricing and terms. Banks waiting to shift unsold deals also run the risk of another surge in volatility, or a deterioration in the credit quality on their books.
Some of the companies they’re exposed to have been downgraded due to the virus’s impact, and may need additional liquidity. Boels Holdings BV, which has a 1.61bn euro loan held by Credit Suisse and four other banks, has drawn most of its revolving credit in full.
Barclays’ Group finance director, Tushar Morzaria, noted on April 29 that the bank’s markdowns and hedges “are likely to be volatile over the coming quarters”, while Credit Suisse’s chief financial officer David Mathers said on April 23 it was “a little bit dangerous to make forward-looking comments” in relation to the bank’s loan exposure.
Even so, where banks are confident in the longer-term outlook for the borrowers they’re exposed to, the rally should make the wait more comfortable.
from Gulf Times https://ift.tt/2LeqfAK
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