Banks Offload $1.1B Loans to Ease Capital, Rates May Rise

Key Takeaway

• Barclays sold $1.1 billion of card assets to Blackstone, showcasing a trend where banks partner with private equity to ease capital burdens.
• The US banking industry prepares for stricter Basel III Endgame rules, affecting around $5.5 trillion in specialty finance products.
• Such deals may lead to higher loan rates for consumers and push traditional banking further into less-regulated private markets.

Evolution of Lending Industry

The Barclays-Blackstone deal, involving the sale of $1.1 billion of card assets, represents a significant shift in the lending industry's dynamics. This transaction, allowing Barclays to offload the capital burden while retaining servicing fees, and enabling Blackstone to generate high yields, exemplifies the innovative approaches banks and private equity firms are adopting to navigate stringent capital regulations. Michael Zawadzki, Blackstone Credit & Insurance Global Chief Investment Officer, emphasized the mutual benefits, highlighting the focus on asset acquisition over customer relationships.

The trend extends beyond Barclays, with KeyCorp engaging in a similar partnership with Blackstone. These forward-flow arrangements enable banks to maintain customer relationships and fee income without the capital constraints imposed by regulatory bodies. The banking sector's anticipation of the Basel III Endgame rules has spurred a proactive search for capital-efficient strategies, with synthetic-risk transfers (SRTs) and asset sales becoming increasingly prevalent.

Regulatory Challenges and Market Implications

The Basel III Endgame and its impending implementation have prompted banks to reassess their asset portfolios, particularly in areas like credit cards and auto loans. The consultancy OliverWyman estimates the affected market in the US to be around $5.5 trillion. Banks like JPMorgan Chase & Co. and Wells Fargo & Co. have explored SRTs to mitigate capital requirements, reflecting a broader industry trend towards optimizing capital amidst regulatory pressures.

However, the shift towards non-bank entities like private credit firms raises concerns about increased borrowing costs for consumers and businesses. The average US credit-card rate has surged from 15% in 2019 to 21.6% in February, as reported by the Federal Reserve. Critics argue that this migration of consumer debt to the private sector could exacerbate regulatory blind spots, with Andrew Park of Americans for Financial Reform advocating for more stringent oversight of the private credit market.

Private Credit's Growing Influence

The surge in private credit deals, highlighted by Goldman Sachs' leadership in a €1.5 billion loan for SumUp Payments Ltd., underscores the competitive landscape between traditional banks and private credit firms. This competition is further exemplified by JPMorgan and Goldman Sachs vying for a $1.05 billion financing for ASC Engineered Solutions, indicating a robust market for private credit solutions.

The involvement of major firms like BlackRock, Apollo Global Management, and Oaktree Capital Management in these transactions reflects the sector's attractiveness and the strategic importance of private credit in funding business expansions and refinancing efforts. The competitive pricing and strategic maneuvers, such as debt restructuring and maturity extension negotiations by companies like Sound Inpatient Physicians Inc., demonstrate the complex interplay between lenders, borrowers, and financial advisors in the current economic environment.

Street Views

• Michael Zawadzki, Blackstone Credit & Insurance Global Chief Investment Officer (Neutral on the lending industry):

  "Banks value the customers and the origination fees. We just want the assets."

• Randy Paine, KeyCorp executive (Neutral on bank partnerships with private firms):

  "If that means setting up a partnership, we will look for that."

• Kevin Alexander, Ares Management Corp’s credit group partner (Neutral on banks optimizing capital):

  "Banks are going to continue to optimize their capital given balance sheet is precious. They’ll be selective with what they finance. Some businesses may not make sense for banks to own anymore."

• Ivan Zinn, Atalaya Capital Management LP Chief Investment Officer (Bearish on consumer loan rates due to non-bank funding costs):

  "There’s just not that much credit to go around and banks need to clean up their balance sheets."

• Andrew Park, Americans for Financial Reform senior policy analyst (Cautiously optimistic about monitoring risks in private credit market):

  "The answer is not loosening bank regulations but rather properly monitoring and containing the risks in the private-credit market."