ss_blog_claim=bd50edc517cf0b7549fe6b5f63b6b5f8 The SLS Business Finance Blog: Banks to See Rising Costs of Funds in the Months Ahead

Tuesday, September 2, 2008

Banks to See Rising Costs of Funds in the Months Ahead

Reprinted from The Monitor Daily Online

The Wall Street Journal noted yesterday that with about $800 billion in floating rate notes and other medium-term obligation coming due over the next 12-18 months, banks will likely be less willing to make new loans to borrowers as investors will be demanding higher interest rates for new bank borrowings.

And for some of the larger banks that have agreed to buy back some $42 billion in auction rate securities, the problem is exacerbated even further. To provide a glimpse of what may be in store, we checked out recent prices for 5-year obligations on JB Hanauer & Co.’s website for a mix of banks and finance companies. And even though many of these companies are currently holding investment grade ratings, the price-to-yield data was indicative of investor sentiment with regard to the real or perceived risk of lending to some of these banks. For example, KeyCorp’s 5-year maturities with a coupon of 6.5% were priced to yield almost 10.5% or something close to a 750 basis point spread over like-term Treasuries. National City’s notes maturing in February 2011 were priced to yield 14.4%, which would translate into a spread of 1170 basis points over similar term Treasuries.

As a contrast, GE Capital’s 5-year notes with a coupon of 5.40% were trading at prices to yield about 4.6%, a spread of about 150 basis points over like-term Treasuries. Similarly Cat Financial’s 5-year notes with a coupon of 4.9% were priced to yield about 4.2%. However, beleaguered CIT showed several 5-year obligations with coupon rates ranging from 4.65% to 5.50%, which were selling at prices to yield about 12.4%, a spread of over 900 basis points. It would also indicate what may be at the root of why CIT’s vendor finance business showed substantially reduced profits of 17.6 million for the first half of 2008 versus 146.5 million, for the same period in 2007.

What this picture would suggest is a significant market advantage or disadvantage, depending on where you sit, when pricing on a match-funded basis in a competitive situation. It occurs to us that sustaining a vendor program, for example, would become increasingly more difficult to expect returns that were anticipated at program inception. And unless subsidized for the long-term, this phenomenon would seemingly preclude an aggressive run at a new vendor prospect.

Editor's Note: As bank costs of funds rise, that affects not just bank lending but equipment finance companies who are reliant on bank loans and lines in order to fund their deals with GE, CIT and KeyCorp listed among them. This is an example of why commercial finance rates are tied to costs of funds and not tied to Prime, as many expect that it is.

No comments: