Banks Scramble to Refinance Their Long-Term Debt

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 (C), JPMorgan Chase (JPM) and American International Group (AIG) 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 (BAC), 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

=================

$208 Billion

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. (AXP), 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. (WFC), 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. It 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.

Comments

[buyitcheap:]

And I thought it would be WAMU that goes under, looks like its AIG.

2008 Aug 18 08:49 AM

[RonB:]

Its very hard to understand why people like this ignore reality to create as much negativity as they can - unless they are short these stocks and are trying to drive them down. Anyone interested in the facts should read Wells Fargo's Q2 transcript and news release. Loans up 15%, revenues up 16%, spreads on new business at the highest rates in years, overall increases in net interest margins, improving Tier 1 ratio, and so on. All this negativity is providing an excellent buying opportunity.

2008 Aug 18 01:07 PM

[Muzie:]

RonB:

I'm quite amused by your implication that all the bears have a conflict of interest because they might be short the stocks while, on the other hand, you point us to Well's Fargo's transcript's as a reliable, totally objective source of information.

WFC's transcripts is very opaque about where the revenues came from, and WFC has refused to give out information about such basic things as delinquency rate on loans. If WFC was so confident, it would boast loud and clear all the details of its books instead of keeping them opaque still.

Bears such as Michael here don't have to be bears - Michael can perfectly well change his mind and decide to buy bank stocks tomorrow if he feels like it.

Wells Fargo CANNOT become a Wells Fargo bear, obviously. It is Wells Fargo's job to paint the facts in the best light possible, as it is the essence of their livelihood.

Reality is in the eye of the beholder.

2008 Aug 18 09:29 PM

[normthefedup:]

I usually disagree with Michael. I've found him to favor the negativity of what's going on and it's disturbing because, again, there are too many out there on the verge of panic seeking a direction, and more importantly, a reason, to run. And in their panic, they are knocking down and stampeding over those of us who have decided to stand and fight. The current mess with Fannie and Freddie are a perfect example. They were "recovering" (and I frankly use the term loosely) over the last week or so. Some Barron's genius decided they are going down the tubes and the "panicked," let's call them the wildebeest, are off and running again, dragging down the entire market and eroding millions of people's net worth. According to Merrill Lynch, the "analysts," and they have just a FEW of them themselves, are only right 44% of the time. That means they're WRONG 56% of the time, yet they drive the markets...and the wildebeest. Fannie has a $2 billion auction tomorrow, it will be a disaster. If the auction had been Friday, no problem. But now it's Wednesday, post-Barron's, and they'll get crushed. Why? One person's opinion. That is ludicrous. Keep it up folks, the doom and gloom about Fannie and Freddie and all the dire forecasts are about to become a self-fulfilling prophecy. Again...why?...because the analysts, who are right less than half the time....are scaring the wildebeest. Let the panic and stampede begin. It's gonna be a rough ride. I used to be a millionaire. Not after yesterday.

2008 Aug 19 08:41 AM

[Gary M P:]

Muzie:

Are you from St.Louis ?

Gary

On Aug 18 09:29 PM Muzie wrote:

> RonB:
>
> I'm quite amused by your implication that all the bears have a conflict
> of interest because they might be short the stocks while, on the
> other hand, you point us to Well's Fargo's transcript's as a reliable,
> totally objective source of information.
>
> WFC's transcripts is very opaque about where the revenues came from,
> and WFC has refused to give out information about such basic things
> as delinquency rate on loans. If WFC was so confident, it would boast
> loud and clear all the details of its books instead of keeping them
> opaque still.
>
> Bears such as Michael here don't have to be bears - Michael can perfectly
> well change his mind and decide to buy bank stocks tomorrow if he
> feels like it.
>
> Wells Fargo CANNOT become a Wells Fargo bear, obviously. It is Wells
> Fargo's job to paint the facts in the best light possible, as it
> is the essence of their livelihood.
>
> Reality is in the eye of the beholder.

2008 Aug 19 05:50 PM

[Jeffyboy:]

You are a doom and gloomer, Mike.

The sky is falling.

Or banks and other financial institutions are doing what they always do in these times. They are riding it out. Right now they are getting bad deals on the debt. They will refinance as things turn. Maybe one of these companies will fail, but I doubt it. As time goes on they will start to turn the corner and will live to see the next FUBAR. CITI and AIG probaly got the most damage. It will be interesting to see how they play there way through this bad time.

2008 Aug 19 09:19 PM

[Instant loan:]

The government has certainly set the stage for new high- grade issuance. There's a tremendous amount of pent-up supply.

2008 Sep 30 08:27 AM

[User 300254:]

No way. I'd rather stick to my original plan of paying off my debt. Im almost done anyway from my instant loan.

2008 Nov 17 11:10 PM

[Helen D:]

I was looking the some useful information that was referred to in the above article in other blogs, but this article was the most helpful so far. Thank you. no fax payday advance

Mar 03 06:56 PM

[Fast Loan:]

The federal government has been trying to help banks for way to long. It's even more frustrating to see what's going on with AIG. I can't believe the American Public hasn't removed all republicans from office since they're the ones that got us in this mess.

Apr 09 02:18 PM