Bank of America and Citigroup flagged by rival JPMorgan for potentially losing money on risky lending contracts
Outflows and tightening conditions in a key corner of the credit market have cost big banks about $2 billion, according to JPMorgan Chase. Bank of America and Citigroup have the most exposure to so-called “lending” contracts in the coverage of JPMorgan analyst Vivek Juneja, according to a June 21 research note. Bank of America and Citi did not immediately respond to a request for comment. A hangover typically occurs when a bank provides short-term financing to acquire a company, with the expectation that it can later pass on the debt to a group of investors, such as fund managers or other banks. However, if market conditions suddenly change, the bank providing the line of credit may be forced to take a loss to sell the debt at a discount or hold onto the loans in the hope that the market recovers. Loans are the main source of funding for the private equity industry, which uses them for its debt-acquired operations. But on fears that a recession is brewing amid the Federal Reserve’s interest rate hike campaign, the market has slowed in recent weeks. According to JPMorgan, leveraged funds have recently seen their strongest outflows since the pandemic hit in 2020, at $3 billion in May and $2 billion through mid-June. according to JPMorgan. According to Juneja, there are $41 billion worth of loans for 12 pending deals identified in media reports. (Banks typically don’t disclose much information about their leveraged lending practices.) “Based on the quoted hang trades, the average price drop would result in a total loss of about $2 billion. for these transactions,” the analyst said. According to Juneja, Bank of America may have the greatest risk among all lenders as it is involved in 9 out of 12 transactions, according to Juneja. Earlier this month, Bank of America’s Chief Financial Officer, Alastair Borthwick, said the company was looking at between $100 and $150 million in the second quarter of stalled transactions. Citigroup was involved in five of the hangovers, a “surprising” development that raised questions about the New York-based company’s risk management, the JPMorgan analyst wrote. That’s because while Bank of America has been the #1 provider of leveraged loans for the past three years, Citigroup is a relatively small company when it comes to a lot of stalled transactions. “Citi stands out as being involved in the five cited loans hanging despite ranking seventh in leveraged loan contracts in 2021,” Juneja said. Meanwhile, JPMorgan and Wells Fargo are the second and third biggest players, but only involved in two hangovers, the analyst said. According to the report, global investment banks including Morgan Stanley, Goldman Sachs, Deutsche Bank and Credit Suisse all had between five and six transactions stalled. While leveraged loan prices are down only about 5% from the end of 2021, they could fall further if the economy weakens, according to the analyst. Loans are considered relatively risky because they are often made by companies that are heavily indebted. “Losses on these loans are likely to vary significantly by deal and by the role of each operator; banks with a larger role will charge larger fees but will also bear the cost of the loan. more holes,” said Juneja. “There is likely to be increased pressure and therefore more losses as the Fed tightens further.” – Michael Bloom of CNBC contributed to this story
