Monday, June 15, 2009

US banks will roll the wall of maturing debt

From NYT DealBook
"Barclays Capital has analyzed financial company debt among United States institutions coming due over the next decade. During the rest of the year, for example, roughly $172 billion in debt will mature; in 2010, an additional $245 billion comes due. That amounts to about $25billion a month in debt rolling into a market with a shortage of buyers willing to invest in it."
Gretchen Morgenson (NYT) argues that this wall of debt with nearterm maturities will create severe problems for the US banking institutions.

The market however has so far discounted this as a non-event. Even with the full expectations of further asset write-downs. Here is an example: Citibank just issued $3 billion of 10-year unsecured debt. These bonds are NOT guaranteed by the FDIC.

The debt has traded to 103.8 since then. The yield is now under 8% (4.3% above treasuries). They originally sold $2 billion, but due to massive demand just sold another billion last week. Remember, this is Citi, a bank that was close to the brink 6 months ago.

Demand for bank paper (and other corporate debt) in the US is now massive. Foreign banks continue to issue debt (see our earlier post.) From Credit Agricole to Kommunalbanken Norway to Caisse Des Depots have recently sold bonds in dollars.

Unless the banking institutions Ms. Morgenson is referring to are too weak to issue debt now, they will either extinguish debt using deposit money or extend it now, while the window is open. Those too weak to do so are most likely the smaller banks that will get shut down by the FDIC anyway. Those that don't take advantage of this opportunity, probably deserve to meet their Darwinian fate for being too slow.
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