US banks hit by leveraged loans as deals slump and rates rise

By Saeed Azhar and Elizabeth Dilts Marshall

NEW YORK (Reuters) – U.S. banks have started to take a hit on their leveraged loan exposure as the trading outlook deteriorates amid rising interest rates and extreme market volatility caused by the Russian invasion of Ukraine.

Bank of America announced on Monday that it was reducing its exposure to leveraged loans by the $300 million mark, Citigroup Inc wrote down $126 million in the second quarter and Wells Fargo & Co took a writedown of $107 million. dollars due to widening credit spreads.

Leveraged loans are usually taken out by highly leveraged companies, usually with lower quality credit ratings. They tend to be used by private equity firms as a way to fund the acquisitions of those companies.

A widening credit spread means mark-to-market losses for banks or even worse – a realized loss if a loan on their books goes sour, analysts say.

“The market turmoil and sharp downturn in the second quarter triggered a downturn in the leveraged financial markets, leading to a reduction in a number of trades across various market participants,” said the Chief Financial Officer of Bank of America, Alastair Borthwick, on a result. call on Monday.

Citigroup chief financial officer Mark Mason said last week that the leveraged finance segment was under considerable pressure in this environment.

“We’re not a big player here. We took a writedown in the quarter, about $126 million,” he said.

Wells Fargo said on Friday its investment banking fees were down, reflecting lower market activity and the $107 million write-down on “unfunded leveraged funding commitments” due to the widening of market spreads.

Inflation exacerbated by supply chain issues and geopolitical developments are weighing on credit profiles, as well as slowing economic growth and tighter monetary policy, said Lyuba Petrova, head of effect finance. of leverage in the United States at Fitch Ratings.

The market is also slowing down.

Leveraged loans fell to $737 million in the first half from $883 million a year ago, according to Dealogic data.

BNP Paribas strategists said in a note that Federal Reserve rate hikes no longer create demand, but could worsen interest coverage ratios – a ratio of leverage and profitability used to determine how easily a company can pay the interest on its outstanding debt.

The US central bank tried to rein in a relentless price spike and pledged a “soft landing”.

In June, the Fed raised its benchmark federal funds rate by 75 basis points, the biggest hike since 1994, as inflation rose unexpectedly despite expectations that it had peaked.

(Reporting by Saeed Azhar and Elizabeth Dilts Marshall in New York; Additional reporting by Davide Barbuscia in New York; Editing by Matthew Lewis)

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