Yahoo Finance Banks Sell Loans to Private Credit in Balance Sheet Twist
(Bloomberg) -- For years, Barclays Plc struggled with what to do about its US credit-card business. It was a cash generator, cranking out a steady stream of revenue, and yet it was costly to run because of the way regulators force banks to set aside capital as a buffer against losses.
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The British lender came up with a solution in February, by selling $1.1 billion of card assets to private equity firm Blackstone Inc. The transaction, part of an ongoing financing arrangement, allows Barclays to collect fees for servicing the loans, but not have to hold them on its books. In return, Blackstone gets to generate high yields for insurance clients.
In essence, Barclays is renting Blackstone’s balance sheet.
“Banks value the customers and the origination fees. We just want the assets,” Blackstone Credit & Insurance Global Chief Investment Officer Michael Zawadzki said in an interview.
The Barclays-Blackstone deal got little attention at the time but may have marked a new chapter in the evolution of the lending industry since the global financial crisis. As capital rules have gotten tougher, banks have had to exit certain businesses or else cede market share to non-bank rivals. Now, they are partnering with those rivals in ways that benefit both parties — even if it is unclear how regulators might react.
Soon after Barclays and Blackstone announced their tie-up, KeyCorp and Blackstone unveiled a similar partnership. In interviews, executives at several private-credit providers said they are holding conversations about more deals, including with some of the largest US banks.
KeyCorp executive Randy Paine, who oversees businesses involved in the Blackstone deal, said banks are looking for capital-efficient ways to serve customers, whoever holds the underlying assets.
“If that means setting up a partnership, we will look for that,” he said.
Barclays declined to comment.
Since the crisis, the biggest banks have had to increase capital levels enormously and back away from areas of corporate lending and trading that regulators deemed too risky. But there are further changes coming as part of a global set of capital rules known as Basel III Endgame.
US officials have not finalized the local version, which will take years to implement and may be much less tough than an initial draft. The Fed plans to issue an updated version of its rules as soon as August, Bloomberg News reported on Wednesday.
The banking industry is already preparing for harsher rules, particularly with respect to credit cards, auto loans and other specialty finance products ranging from aircraft leasing to supply-chain financing. The size of the affected market in the US is about $5.5 trillion, consultancy OliverWyman estimated in a recent report.
To lessen capital burdens, banks have already been entering arrangements known as synthetic-risk transfers, or SRTs. In those transactions, banks hold onto the assets but pay investment firms a fee to share future losses, thereby lessening capital requirements. Initially popular in Europe, SRTs have taken hold recently in the US, with JPMorgan Chase & Co. and Wells Fargo & Co. among banks seeking such deals.
In the more novel partnerships that Barclays and KeyCorp entered, banks are using what are called forward-flow arrangements, where private firms finance ongoing businesses. That way, they can keep customers and earn fees without facing harsher capital constraints.
“Banks are going to continue to optimize their capital given balance sheet is precious,” said Kevin Alexander, a partner in Ares Management Corp’s credit group. “They’ll be selective with what they finance. Some businesses may not make sense for banks to own anymore.”
Indeed, the failure of regional lender Silicon Valley Bank last year led to a string of exit deals. In some cases, struggling lenders sold assets to quickly raise funds while others decided to get rid of non-strategic businesses altogether.
How far the trend will go is unclear, but experts see wide-ranging implications.
Because non-banks have higher costs of funding, consumers and businesses may see loan rates rise. They are already paying more for credit, especially unsecured loans, due to interest-rate hikes and rising delinquencies. For instance, the average US credit-card rate was 21.6% in February, up from 15% in 2019, according to the Federal Reserve.
“That has to trickle down into the system,” said Atalaya Capital Management LP Chief Investment Officer Ivan Zinn. “There’s just not that much credit to go around and banks need to clean up their balance sheets.”
Even more concerning, critics say, is that the migration of consumer debt into private hands pushes traditional banking businesses further into the shadows of Wall Street where government agencies have little oversight.
“The major driver of the growth in private credit has always been to get around regulations,” said Andrew Park, a senior policy analyst who focuses on private credit at Americans for Financial Reform, a Washington-based coalition of consumer and investor advocates. He pointed to previous ways risk has shifted to non-bank markets when new rules are imposed.
“The answer is not loosening bank regulations but rather properly monitoring and containing the risks in the private-credit market,” he said.
The Fed declined to comment on these trends. Michael Barr, the Fed’s vice chair for supervision, addressed the issue in October, saying a balance has to be struck so that rules do not push too much activity into private markets.
Lenders say they have little choice but to pursue capital-lightening deals, given what’s happening with regulations and the pressure they face to maintain profits. Barclays’ agreement with Blackstone came just a week after senior executives faced a litany of questions about their US card strategy at investor day.
In joint statements announcing their agreement, Barclays and Blackstone described it as a long-term, strategic deal that will grow in the coming years.
“Banks deserve credit for finding ways to remain relevant and generate revenue even if they don’t hold all the assets,” said Aneek Mamik, head of financial services at Värde Partners Inc. “These moves are not simplistic or quick, it’s a big shift in identity.”
(Adds details on timing of Fed plan for capital rules in 11th paragraph.)
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