Rating agency Moody's has downgraded the entire US financial sector's outlook to 'negative', citing a 'rapidly deteriorating operating environment'.
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Wall Street bank stocks plunge after Credit Suisse chaos rattles US market
"The nation’s largest banks got walloped Wednesday — showing they weren’t immune to the crisis that has hammered regional lenders — after Credit Suisse reignited fears of a contagion in global banking.
Shares of JPMorgan Chase and Citigroup slid more than 4%, while Wells Fargo and Goldman Sachs fell more than 3% and Bank of America sank 0.9%.
US banks got slammed as Zurich-based Credit Suisse plunged 24% after its biggest shareholder, Saudi National Bank, said it wouldn’t pour more money into the troubled institution.
Market experts are increasingly fearful that Credit Suisse will require a bailout due to a rapid loss of confidence in its stability — potentially accelerating a chain reaction that began with Silicon Valley Bank’s implosion and could upend other struggling firms.
Research analysts at Exane said the “most likely scenario” to resolve issues at Credit Suisse is a bailout by the Swiss National Bank and its financial regulator Finma, Reuters reported.
“The sell-off in the banks now is broad-based which suggests to me that there has to be some kind of game-changing decisive action to reverse and stabilize the situation,” the Exane analysts said in a note.
Despite the trouble, Credit Suisse Group chairman Axel Lehmann insisted Wednesday that government assistance “isn’t a topic” for the embattled lender.
Credit Suisse’s stock cratered to an all-time low shortly after admitted to finding “material weaknesses” in its financial reporting over the last two years. The Swiss bank has significant holdings in the US, raising concerns of further contagion.
✓ The turmoil comes on the heels of credit rating agency Moody’s cutting its outlook for the banking system due to “rapid deterioration in the operating environment” following the failure of Silicon Valley Bank and other firms.
Moody’s placed six regional banks on “downgrade” watch: First Republic, Zions Bancorp, Comerica, Intrust Financial, UMB Financial and Western Alliance.
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✓ Shares of San Francisco-based First Republic hovered in negative territory and were down 21% Wednesday. KeyCorp shares were down 3.5%.
✓ Other regional banks seesawed, paring earlier losses and turning positive by midday. Western Alliance surged 8.3%%. Comerica rose 3.1%. But Zions Bancorp dropped 1.9%.
✓ Charles Schwab’s stock was up 5.1% after CEO Walt Bettinger revealed a day earlier that he bought 50,000 shares in the firm.
Volatility has spiked this week for regional bank stocks — which plunged across the board on Monday only to bounce a day later. First Republic shares plunged nearly 70% to start the week before rallying on Tuesday.
Wednesday’s stock plunge extended to the broader market.
The Dow tumbled as much as 600 points on economic worries before finishing down 280 points, or 0.9%. The tech-heavy Nasdaq and S&P 500 fell less than 1%.
The entire banking sector has been under pressure since federal regulators were forced to shut down SVB and another failed institution, Signature Bank of New York.
The two firms ranked as the second- and third-largest bank failures in US history.
Billionaire investor Ray Dalio of Bridgewater Associates warned SVB’s collapse could be a “canary in the coal mine” scenario that will hurt the venture capital world and “well beyond it.”
Dalio suggested that cascading trouble in the banking sector could result in more federal intervention.
“Looking ahead, it’s likely that it won’t be long before the problems pick up, which will eventually lead the Fed and bank regulators to act in a protective way,” Dalio wrote in a blog post Tuesday.
Follow The Post’s coverage of Silicon Valley Bank’s collapse
- Big Tech wins unfair advantage over American workers in SVB scandal
- Bank customers will pay for SVB bailouts through higher fees, cuts in services
- SVB bailout shows ‘capitalism breaking down before our eyes’: hedge fund titan
“So I think we are approaching the turning point from the strong tightening phase into the contraction phase of the short-term credit/debt cycle,” he added.
✓ The feds have reportedly been investigating the inner workings at SVB prior to its failure — including last-minute stock sales by its top executives.
On Tuesday, Reuters reported that the Federal Reserve is mulling stricter rules and oversight for midsize banks in the wake of SVB’s collapse."
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Western Alliance Bancorp. Stock Quote (U.S. - WAL - MarketWatch
Bank Fears Rock Markets as Traders Weigh Fed Pause: Markets Wrap
Asian stocks headed for declines after US stocks fell and government bonds and the dollar rallied as fresh turmoil at Credit Suisse Group AG roiled markets days after the collapse of three American lenders, casting doubt on whether the Federal Reserve will increase interest rates next week.
Equity futures for markets in Japan, Australia and Hong Kong dropped. US futures showed fledgling signs of stability after the S&P 500 fell 0.7% Wednesday. The US benchmark pared earlier losses after Switzerland’s central bank said Credit Suisse would receive a liquidity backstop if needed.
Moody’s Cuts US Banking System to Negative After Lender Failures
"Moody’s Investors Service cut its outlook for the US banking system to negative from stable, citing the run on deposits at Silvergate Capital Corp., SVB Financial Group’s Silicon Valley Bank and Signature Bank that led to the three lenders’ collapse in less than a week.
While federal regulators “announced that all depositors of SVB and Signature Bank will be made whole, the rapid and substantial decline in bank depositor and investor confidence precipitating this action starkly highlight risks in US banks’ asset-liability management exacerbated by rapidly rising interest rates,” Moody’s said in a research report late Monday."
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Posted: 8 hours ago
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ADDENDUM
CLOs: ground zero for the next stage of the financial crisis?
In the midst of a global pandemic, emergency rooms in the US have fallen strangely quiet as patients with other illnesses have stayed away for fear of contracting Covid-19. As a result, one of the surprising corporate casualties of the coronavirus crisis could be some of the companies that provide staff for hospitals.
Envision, one of the largest medical staffing companies, completed a restructuring of its roughly $7bn of debt this month as it moved to stave off bankruptcy. This comes less than 18 months after KKR — one of the oldest and largest US private equity firms with more than $200bn of assets — bought the Nashville-based company for nearly $10bn.
The Envision deal highlights one of the stress points in a financial system that is creaking under the pressure of the coronavirus-induced recession. To fund around two-thirds of the acquisition, KKR loaded the company’s balance sheet with junk-rated loans and bonds — a familiar private equity tactic. Those securities provided fuel for one of Wall Street’s least known but most important debt machines: collateralised loan obligations.
The close cousin of collateralised debt obligations, the pools of mortgage-backed securities that became notorious during the subprime meltdown over a decade ago, CLOs package up risky corporate loans into a group of new securities that have cascading exposure to default by any of the underlying borrowers.
To the outsider, they can appear to perform some of the alchemy that was evident in the run-up to the financial crisis, transforming risky credits into securities where the largest tranche is awarded a triple A rating.
“CLOs and the loans underpinning them are ground zero in terms of the vulnerability of this crisis,” says Matthew Mish, a credit analyst at UBS.
The US market — by far the biggest — has expanded from $327bn in 2007 to $691bn at the end of 2019, according to data from JPMorgan, rising in lockstep with the underlying leveraged loan market which has doubled from $554bn to nearly $1.2tn, according to data from S&P Global.
The growth in the two markets is the result of some of the most powerful trends that have reshaped the financial world since the 2008 crisis — reflecting both the rapid expansion of large private equity firms, which have ascended Wall Street’s hierarchy as investment banks have retreated, and the willingness of yield-hungry investors to fund their activities.
In some cases, the PE firms both generate the supply of loans for CLOs through their leveraged acquisitions, while also acting as the manager of CLO structures. And amid such strong demand, the conditions attached to many loans have become looser.
After the initial onslaught in March when the coronavirus pandemic caused a crisis of confidence in credit markets, CLO securities have recovered some ground, helped by the Fed’s aggressive interventions. However, the worry is that further corporate downgrades and escalating defaults could start to unravel sections of the CLO market, in turn prompting a much deeper sell-off that magnifies the broader impact to the economy.
Although proponents of CLOs say the shock absorbers built into their structures will prove resilient, the mixture of complexity, leverage and low credit quality offers some uncomfortable echoes of the last financial crisis.
“CLOs haven’t caused this recession but they will make it worse,” says Megan Greene, a senior fellow at Harvard Kennedy School. “We are on course for a massive debt cycle.”
Despite warnings from analysts and rating agencies that Envision’s deal epitomised a weakening of lending standards, the $5.4bn loan backing the buyout became one of the most widely owned by CLOs.
The onset of coronavirus has seen the price of the loan falling sharply to below 70 cents on the dollar. Moody’s and S&P have downgraded the loan to triple C, a rating reserved for companies close to default and that CLOs are discouraged from investing in.
Envision is not alone. Around a quarter of the loans held by CLOs have already been downgraded, according to Bank of America analysts, and last month rating agencies put more than 1,000 tranches of CLO debt on review for downgrade.
In April, Envision began cutting the hours of emergency room doctors who have been one of the first lines of defence for Covid-19 patients. Bonuses have also been postponed and non-clinical staff were told they would be temporarily furloughed or see pay reductions.
“We are putting ourselves literally on the line, often without the protective equipment we need, to then be told our hours are cut, or that schedules are going to change,” says one emergency room doctor working for Envision in Florida. “It’s frustrating that this large company backed by a very large private equity group can’t find other ways around this that don’t hurt the doctors facing this disease head on.” Envision and KKR declined to comment.
Lender’s appetite
Before coronavirus triggered an unprecedented shutdown of international travel, executives at the New York and London-based investment firms that create CLOs made regular pilgrimages to Tokyo to visit a very important client: Norinchukin Bank, Japan’s largest agricultural lender.
These western managers would fly halfway around the world because the bank commonly known as Nochu, which for nearly a century has managed the savings of farmers and fishermen from Hokkaido to Okinawa, has turned into the whale of the CLO market. In the decade after the financial crisis, it became the single largest holder of the highest-rated, triple-A securities of CLOs, with holdings worth $75bn, according to the bank’s filings.
The Japanese bank will only buy CLO bonds from those it considers to be in the top tier of managers — often the credit arms of private equity houses that issue multiple new CLOs a year. The so-called “Nochu-approved list” of managers that meet its demanding criteria are rewarded with a regular buyer often at a lower price than other investors.
“They do a lot of due diligence — it’s painful getting on their approved list,” says one CLO manager. “But it’s worth it.”
Nochu has reason to be rigorous: the bank has been burnt by structured credit products before. In 2009, the co-operative took what it termed “aggressive write-offs” across its ¥6tn portfolio of asset-backed securities that included CDOs.
“We will continue to monitor the overall market movements because this is the kind of environment that we are in,” the bank said of its CLO investments.
However, for large investors in the top-rated slices of CLOs such as Nochu, there is one statistic that provides comfort: there has never been a default of a senior, triple-A rated tranche of debt issued by a CLO. So far.
In a typical CLO, a thin equity layer sits at the bottom of the structure, awarded the potential for the highest returns but also sitting first in line to absorb losses should the underlying loans default. A series of increasingly highly rated bonds sit above the equity layer, getting increasingly further away from the prospect of defaults impairing the investment.
The vast majority of the debt holds a pristine, triple A rating, which has allowed these securities to draw in a large group of risk-averse investors that might otherwise be deterred from the hazardous loan market underpinning CLOs.
Protections have also been built in, ensuring money is diverted to pay investors in the highest rated tranches of debt first, should the underlying loan market come under severe stress.
Those protections are now being put to the test. While the history is favourable, some investors warn that the current crisis, as well as the state of the loan market, is far different from anything that has come before. Rather than a crisis originating in one corner, such as consumer debt in 2007, the global shutdown is throttling earnings across sectors.
Furthermore, the quality of the underlying loans held by CLOs has sharply deteriorated over the past decade. Moody’s noted that financial covenant protections for investors were at their worst on record just before coronavirus hit. The average number of lower-rated, single B loans held by CLOs was also at a high point.
As coronavirus has spread, sending economies into lockdown and devastating corporate revenues, rating agencies have swiftly begun downgrading loans even further. More than 12 per cent of the loans held by CLOs are now rated triple C — often indicative of a company on the brink of collapse, according to S&P Global.
“The number of loans downgraded in the US and Europe has been at such a harsh and quick pace,” says Geoff Horton, an analyst at Barclays. “It’s unlike anything we have seen in the past.”
Already, many of the protections for senior debtholders have kicked in as CLO managers are forced to contend with the current crisis. “This is severe,” says Pratik Gupta, an analyst at BofA.
Growing risk of default..."
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