Investment managers may have licked their lips at the expectation of European banks selling assets at knock-down prices in the face of various regulatory and business pressures since the crisis. But senior managers at Credit Suisse say the "deluge" they counted on soon will largely fail to materialise.
Some banks have bought protection on their risk books, transferring either mezzanine or first loss risk to other parties , depending on the jurisdictions in which they operate. “Rather than selling and taking a 30% hit, banks are looking to buy protection against those assets, from other bank counterparties and end investors, to make it more efficient to hold the assets.”
Some bought protection structures – sometimes written by hedge funds and other non-bank financial institutions – such as CDS and CLO-type structures or mezzanine hedges, transferring first-loss risk to other parties. “Rather than selling and taking a 30% hit, banks are looking to buy protection against those assets from other bank counterparties to make it more efficient to hold the assets.”
A lot of the work Wahid’s team is doing involves helping banks with term funding.
“For real estate and mortgage assets banks are trying to term out the funding they have. We would look to lend them money secured on those assets. That would reduce their reliance on short-term funding and help to cut the funding gap. Banks need to balance the desire to push out their funding with the cost that implies locking in credit costs for the long term.”
Many European banks have tapped the €1trn of European Central Bank LTRO support, to relieve immediate pressure to delever.
Wahid added banks, logically, are unwilling to sell at levels below impairments they already took for assets.
But at the same time, hedge funds needed to buy at lower levels in order to generate the magnitude of returns their own clients expected of them.
Of illiquid assets, Wahid said: “Assets like infrastructure loans, which are long-dated and written with coupons that were originally tight and are still performing, would require significant discounts to be interesting for non-bank buyers and that is a hit the banks are not willing to take.” Additionally, hedge funds buying them may have to manage down their clients’ expectations of returns, he says.
Wahid said European banks still face pressure to deleverage balance sheets, and with downgrades of some assets, the capital required to be held against these risk-weighted assets has increased dramatically in some instances.
Some contraction of balance sheets occurred via sales of non-domestic exposures, or where banks have decided to sell assets generally.
Bank of Ireland offloaded infrastructure and UK real estate portfolios to Blackstone and Kennedy Wilson; Anglo Irish Bank Corp sold its US loan book to Lone Star Funds and US banks; Santander and ING have sold Latin American units; and French banks, for example, have sold off liquid, highly rated dollar-denominated CLOs.
RBS has done deals with Blackstone, while Dexia is selling Turkish operations to Russia’s Sperbank.