The market’s ongoing thaw has caused treasurers to wait, but threats—like the bank tax—loom.
The loan market has seen a remarkable rebound in the last nine months. Whereas a year ago it was difficult to get one-year money, now a couple four-year transactions have popped up and all eyes are peeled for the first five-year bellwether. In the leveraged market, terms have eased dramatically, and market observers have stood agog as boom-era toxic waste like PIK toggle bonds and loans have crept back out of the shadows. But while many treasurers in the NeuGroup’s peer networks feel that it is prudent to wait and see how things develop—especially given uncertainty about financial regulation—before stretching tenors, there may be reasons to consider acting more swiftly.
The first is financial regulation itself. Gordon Brown’s announcement over the weekend that a global bank tax deal looked likely, combined with the wholesale liabilities tax on the table in the US (not to mention the Volcker Rule and other bank-unfriendly aspects of American financial reform proposals) could affect lenders’ RAROC calculations significantly. That would be fairly irrelevant if a robust shadow-banking system was vacuuming the dreck off bank balance sheets, but new CLOs are few and far between, and those that do come to market will most likely face scrutiny of their lenders’ contingent exposures and will require that sponsors pony up significant equity.
Then there’s the Federal Reserve’s move to unwind its quantitative easing strategy, first, by ending its mortgage bond purchases last month. It has also tested the plumbing on its reverse repo operations to draw liquidity out of the market and is consider further tweaking excess reserves. The last is the least of borrowers’ worries, since despite the Fed’s monomaniacal focus on excess reserves, they’ve been proven time and again—especially in the last crisis—to have no real effect on credit creation.
No, the question becomes: if the Fed does tighten through back-door mechanisms (the Fed Funds rate being too politically visible), that could easily gut the rally in bank profits that the liquidity glut has funded in the past year. That, in turn, would direct more attention to analyses like those by Institutional Shareholder Services, which has pointed out that the toxic waste on bank balance sheets, conveniently stuffed into their Level 3 buckets after the Securities and Exchange Commission eviscerated FAS 157 in March 2008, is still there.
The really bad stuff is linked to subprime, of course, and even as the larger residential real estate market has showed signs of stabilizing, subprime has not. Yes, the government has facilitated the sale of some of this to private investors—funded by the US taxpayer—but banks remain full of wormy assets. And there’s a limit to how long Mom and Pop will tolerate being forced to play the role that CLO purchasers did back in the day. The upshot for treasury: bank chest-beating may mask a chronic illness. That should be considered when deciding when and if to take the money and run.