The corona believers

He is a Wall Street legend and leads the largest bank in America: Jamie Dimon, chief executive of JPMorgan Chase. When Dimon recently presented the first-quarter financials, his outlook was grim: "Given the likelihood of a pretty severe recession," JPMorgan had set aside about an additional $7 billion in provisions for defaults. Now provisions stand at $25 mil lion, two-thirds of it for credit card debt.

Dimon's precautionary measure coincides with Alfred Mettler's assessment. Swiss finance professor teaches at the University of Miami: "If the lockdown does not end quickly, respectively, a deep and severe recession threatens, then the banks will also suffer."This is because private households and small and medium-sized enterprises in particular would have hardly any reserves in the United States. "Forty percent of Americans don't have $400 for an emergency loan," says Mettler. Living from hand to mouth.

This is particularly serious because the corona virus is crippling the US economy. More than twenty million jobs lost so far due to pandemic outbreak. And without a weekly paycheck, the payment morale of U.S. households is falling rapidly. The government has therefore launched a "Paycheck Protection Program" that allows SMEs to cover their running costs for up to two months. These PPP loans are intended to secure wages, rents and mortgage interest and thus avert insolvencies. UBS also gave 2 billion dollars for the paycheck program at the beginning of April.

This is not an altruistic act. UBS and Credit Suisse together have more than half a trillion francs in loans outstanding. About half of them abroad. In view of the economic consequences of the pandemic, there is a threat of a revaluation of the loan books. There are already signs that the creditworthiness of debtors is dwindling. Rating agency Standard & Poor's has either downgraded or placed one in three borrowers on a negative outlook in North America since the pandemic broke out. In Europe, one in five was affected. The majority were debtors whose securities were already considered speculative. The consequence: if the creditworthiness of borrowers deteriorates, banks will have to back more equity capital. If there are defaults, then there is a threat of write-offs on equity capital.

Credit defaults on the rise

Germany's Berenberg predicts that loan defaults at European banks will increase by 70 percent this year and by 25 percent next year. Specifically, the analysts forecast a fourfold increase in defaults for UBS, from a very low $78 million in 2019 to $297 million this year. UBS finance chief Kirt Gardner in mid-March raised the prospect of a "moderate increase in loan defaults". According to Berenberg forecasts, Credit Suisse's defaults are likely to rise to over half a billion Swiss francs this year. A study by the British Barclays concludes that CS is taking greater risks in its lending business and is therefore feeling the economic consequences of the Co-rona pandemic more strongly. The bank is active, for example, in the financing of pipelines for the American oil and gas industry. The energy sector in particular is being hit hard by the pandemic.

Also, CS remains one of the leading financial houses in structuring and securitizing loans to date. Historically, this can be explained by the takeover of the investment bank Donaldson, Lufkin & Jenrette in 2000. After the financial crisis, the junk bond and leveraged loan business has experienced an unprecedented revival. The latter are loans for companies with a high debt-equity ratio. At the same time, creditor protection clauses for this have become increasingly lax. According to S&P, more than 90 percent of these leveraged loans in Europe last year were so-called covenant-lite loans. In 2011, this figure was still zero percent.

The development was also driven by private equity firms, which raised a lot of money in the low interest rate environment of recent years and subsequently outbid each other with leveraged takeover deals. The formula for these leveraged buyouts is always the same: the greater the degree of debt, the higher the return on equity. Investment banks such as Credit Suisse syndicated the loans, structured them and then placed the debt capital with institutional investors such as insurance companies and pension funds. Either as high-yield corporate bonds or securitized as collateralized loan obligations. Yet CLOs are nothing more than loan bundles tranched according to risk classes.

No appetite for risk

But the Corona pandemic has thoroughly spoiled the appetite for such risk papers. "The market for CLOs, leveraged loans and high-yield bonds has virtually ground to a halt," says John Feigl, former head of credit research at Credit Suisse. This has consequences for the banks: "In this environment, they no longer bring the committed loans off their own balance sheet."What was actually intended as bridging finance until investors absorb the debts of companies with poor credit ratings is becoming a burden on the company's own books and equity capital in the current crisis. By the way, the same applies to the so-called warehouse lines, warehouses for unplaced CLO.

At the end of March, more than 13 billion euros in bridging loans were outstanding, which European banks could not "unload" from investors because of the Corona crisis, the "Financial Times" recently wrote. This does not include the largest European leverage buyout deal in years. It is about the takeover of the Thyssenkrupp lifts division for 17 billion euros. The deal is two-thirds debt financed. The consortium of credit banks also includes UBS and CS. You, together with other banks, would have wanted to place about 8 billion euros of debt securities with investors in the next few months. But then came the virus.

Back to the USA: There, JPMorgan boss Dimon not only set aside additional billions for loan defaults. He also wrote off $900 million on bridge loans.

616 billion

francs of loans are on the books of the two major banks UBS and Credit Suisse. Of this, CS accounts for 298 billion francs and UBS for 328 billion dollars. A large part of the loans is secured with securities and real estate.

Loan defaults Bank Berenberg predicts that recorded loan defaults at both major banks will rise in 2020. At CS by 65 percent to 535 million francs. At UBS, it's $297 million, up from $78 million a year earlier.

CS: Pandemic weighs on allowance for credit losses (in millions). Fr.)*

UBS: Increase threatens value adjustment credit risks (in Mio. dollars)*

Like this post? Please share to your friends:
Leave a Reply

;-) :| :x :twisted: :smile: :shock: :sad: :roll: :razz: :oops: :o :mrgreen: :lol: :idea: :grin: :evil: :cry: :cool: :arrow: :???: :?: :!: