Displaying items by tag: banks

Preferred stocks with a $25 par value, which trade on the New York Stock Exchange, have gained popularity but yield just 5% to 5.5% for major banks, a modest premium over the 30-year Treasury. 

According to Nuveen portfolio manager Douglas Baker, economic resilience and an anticipated soft landing make bank-issued preferreds more appealing, despite limited issuance due to banks’ reduced need for capital. Issuers have redeemed more than they’ve issued this year, tightening supply in the $25-par market, which has seen a 13.1% gain year-to-date. 

Baker points out that tax advantages, high yields, and stock-like trading add to preferreds' appeal. However, their perpetual nature and redemption rights limit price gains and increase sensitivity to rising rates. 

Finsum: There is strong demand for these types of unusual but tax efficient investments in the wider market.

Direct lending, once a niche market for companies with lower credit ratings, has expanded into a powerful alternative for both middle-market and large-cap firms, managing nearly $1.7 trillion by mid-2023. 

This growth has been fueled by private credit’s ability to offer flexible, borrower-friendly terms, even in billion-dollar deals traditionally dominated by banks. Banks, recognizing this trend, are now entering the direct lending space themselves, fostering competition that benefits borrowers with better pricing and more tailored financing solutions.

 As direct lending continues to grow, it's poised to play an increasingly vital role in funding mergers, acquisitions, and other corporate transactions, especially as the market prepares for potential interest rate changes later in 2024.

Finsum: It’s worth monitoring banks direct involvement in direct lending, because this could change the evolution of the industry. 

With private credit booming, private equity firms are upping their forecasts for their lending businesses. Apollo Global sees loan origination exceeding $200 billion annually in the next couple of years, up from its previous forecast of $150 billion. It’s seeing increased loan demand due to faster economic growth and public and private spending on infrastructure.

What’s new is that many of these private equity giants are now looking at lower-risk lending to investment-grade companies to fuel growth. This would put them in even more direct competition with banks. Apollo’s co-President Jim Zelter sees many investment-grade domestic companies pursuing capital expenditure projects and believes that private credit can compete with fixed income and equity as funding sources.

Already, banks are feeling some impact. In Q1, JPMorgan reported $699 billion in non-consumer loans outstanding, which was a $3 billion decline from last year. CEO Jamie Dimon has warned that the entry of new lenders brings ‘an area of unexpected risk in the markets.’ 

Previously, he noted that these lenders have less transparency and regulations than banks, which ‘often gives them a significant advantage.’ He specifically cited startup banks, fintech companies, and private equity firms as examples of companies that function effectively as banks but are outside of the regulatory system. 

Finsum: Private credit is taking market share away from banks. Now, private equity firms are looking to target investment-grade companies. Many banks are warning that this brings risks to the financial system.

Over the last few years, Wall Street banks have been losing market share to private lenders. Recently, they have been looking to win back business by serving as intermediaries between private lenders and companies. 

Previously, leveraged buyouts were financed by a combination of high-yield bonds and/or leveraged loans, arranged by a major bank or group of banks. And this accounted for nearly a third of investment banking revenue on Wall Street.

However, private lenders have muscled in on this line of business, forcing banks to adopt and come up with their own strategies to remain viable. Banks like Wells Fargo and Barclays have partnered with private credit funds to source deals, advise lenders, and help companies navigate the right steps to secure financing. 

Banks also have preexisting relationships with many privately held companies. According to Barclays, private credit funds have $430 billion in uninvested capital. Since the 2008 financial crisis, banks have had more stringent capital requirements. This means it is more desirable to advise and provide services to borrowers rather than take on additional balance sheet risk. 

It’s also helping Wall Street banks get through a dry period for deals due to high interest rates, impeding M&A activity. They are able to collect fees from lenders and borrowers. Typically, direct lenders will split fees with the banks that originate the deal, between 25 and 75 basis points. 

Finsum: As private lending has displaced a major chunk of Wall Street’s investment banking revenue, banks are adapting by serving as intermediaries for private lenders and borrowers.  

In 2023, private credit funds managed $550 billion in assets and generated 12% in average returns for investors. Private credit has been ascendant the last couple of years and helped private equity firms find a new source of revenue. 

As public market financing become less available, direct lenders extended credit to small businesses and buyout deals, replacing syndicated loans and the high yield bond market. It resulted in private credit growing from less than $100 billion in 2013 to its current size.

This year, investment banks are once again stepping into the fray. So far, $8.3 billion of private market debt has been refinanced via syndicated loans, indicating that the high yield bond market in the US is once again a viable option for companies. In leveraged buyouts, banks are also competing as evidenced by JPMorgan’s financing of KKR’s purchase of Cotiviti, a healthcare tech company.

Spreads for syndicated loans and high yield bonds have dropped to thier lowest levles in 3 years. Rates are now between 200 and 300 basis points below what private credit lenders were offering in December. 

Private equity firms are expected to pivot into higher quality, asset-backed financing such as credit card debt and accounts receivables to replace revenue from private credit. They would also benefit from an improvement in public market sentiment and liquidity as they are sitting on a backlog of unsold investments in portfolio companies. 

Finsum: The private credit market has boomed over the last couple of years due to anemic public markets and hesitant banks. Now, banks are once again competing for business and offering more favorable terms.