The Financial Times is reporting US banks scramble to refinance maturing debt.
Battered US financial groups will have to refinance billions of dollars in maturing debt over the coming months, a move likely to push banks’ funding costs higher and curb their profitability, say bankers and analysts.
Last week, financial groups including Citigroup, JPMorgan Chase and American International Group borrowed almost $20bn in new long-term debt, paying some of the highest interest rates ever in order to lock in funding. The wave of refinancing is set to continue for several months as billions of dollars in bank debt come due.
For example, Citigroup has more than $5bn of maturing bonds in August, but this climbs to $12.8bn in December, according to Dealogic data. Bank of America, with $7bn maturing in August, also faces higher refunding needs in December, with $9bn of maturing bonds.
Adding together 10 of the biggest bank borrowers, Dealogic said that maturing bonds total $27bn in August, $52bn in September, $23bn in October, $20bn in November and $86bn in December.
2008 Refinance Needs
$27bn in August
$52bn in September
$23bn in October
$20bn in November
$86bn in December
In a normal market that would not be such a big deal. In this market it could be a disaster. It all depends on exactly how much the banks have to pay to secure long term financing.
However, the problem does not just stop at banks. Insurance companies, auto companies, airlines, etc, will all be competing for long term financing, some sooner than others.
Corporate Bond Sales
Bloomberg is reporting Citigroup, AIG Lead Most U.S. Bond Sales Since June.
Aug. 15 (Bloomberg) — Citigroup Inc. and American International Group Inc. led the busiest week of corporate bond sales since June as financial companies lured investors with record yields over benchmark rates.
Financial companies are making concessions to investors after posting $107 billion in second-quarter credit losses on plummeting mortgage-linked securities. The credit crisis is “far from over” and the global economy will slow as lending tightens further, a Merrill Lynch & Co. analyst said this week.
Citigroup sold its 6.5 percent senior notes at a yield of 337.5 basis points more than Treasuries, almost 50 basis points more than what the New York-based bank paid on similar debt four months ago, according to data compiled by Bloomberg. Moody’s Investors Service gave Citigroup’s notes a rating of Aa3, its fourth-highest level of investment grade, and Standard & Poor’s ranked them an equivalent AA-.
AIG sold the 8.25 percent notes after reporting its third- straight quarterly loss. The debt paid a yield of 433 basis points over benchmark rates. On Dec. 7, AIG sold $2.5 billion of 10-year notes at a spread of 180 basis points.
American Express Credit Corp., a unit of the largest U.S. credit-card company, sold $2 billion of five-year notes with a 425 basis point spread, 62 percent more than what it paid on similar debt three months ago.
New York-based JPMorgan sold $1.6 billion of 8.625 percent perpetual preferred securities following a $1.5 billion credit writedown. Wells Fargo & Co., the biggest bank on the U.S. West Coast, sold $600 million of 8.625 percent trust preferreds after boosting the size from $250 million.
AIG has turned out to be a bottomless pit. They partook of the ‘free lunch’ provided by writing CDS in the 2002-2007 period to such an extent that management has for months now failed to even realize what the losses are. It is possible for AIG to go under, as the underlying debt products continue to melt. The AA rated mortgage debt pools in the ABX-HE indices now trade at only 10 cents on the dollar and CMBX spreads are at new highs. Every large writer of CDS on this garbage is in danger of going under. Perhaps all it takes to push things over the edge is a few key players not being able to refinance long term bonds at anything close to expected rates.
Mike “Mish” Shedlock
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