Snapshot for week beginning 30 May. US banks were well capitalised going into the global pandemic, but the outbreak of Covid-19 sparked a serious economic downturn that has placed increasingly severe stress on the banking system.
The resulting sudden stop in global economic activity has subjected banks to large credit losses.
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Throughout the crisis, bankers have been asking themselves how much capital their bank would need to guard against low earnings prospects, higher credit costs, and unforeseen strategic opportunities.
For a number of banks, the response has been to raise capital. There’s little doubt that an extended economic downturn could easily sap banks’ current equity capital.
Stress test modelling by the Minneapolis Fed indicates that under severe Covid-19 scenarios, large banks, those with assets greater than $100bn each, could together lose hundreds of billions of dollars of equity capital.
Meanwhile, banks have to pay the interest on their own liabilities, such as deposits. Doing otherwise would trigger a default. So they must pay their creditors while absorbing the losses out of their equity.
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By GlobalDataWhile banks have more equity today than they had going into the 2008 financial crisis, the lockdowns are imposing economic hardship far more quickly this time.
Banks’ capital raises hit highest level seen in over a decade
In 2008, US taxpayers injected about $200bn of capital to strengthen banks.
Raising that amount from private investors today, as a strong, preventive measure, would ensure that large banks can support the economy over a broad range of virus scenarios.
If the crisis turns out less serious than we fear, banks can return the capital through buybacks and dividends once the crisis passes.
A number of banks are taking advantage of interested investors and relatively low pricing to pad existing capital levels with new funds.
Other banks may want to consider striking the markets with their own offerings while the iron is hot.
Lower pricing can also mean refinancing opportunities for banks carrying higher-cost debt; effortlessly shaving off basis points of interest can translate into crucial cost savings at a time when all institutions are trying to control costs.
Most of the raises to-date have been subordinated debt or preferred equity, as executives try to avoid diluting shareholders and tangible book value with common equity raises while they can.
Deal of the week: Owl Rock Prices $450M Unsecured Notes Offering
Specialty finance company Owl Rock Capital has priced a public offering of $450m unsecured notes, due in June 2028 at a rate of 2.875%.
Owl Rock will have the option to redeem the notes in whole or in part at any time at par value plus a “make-whole” premium, if it applies.
Owl Rock Capital plans to use the funds raised to pare down its existing debt inclusive of the revolving credit utilized. This includes $1.295 billion of commitments maturing in September 2025, other commitments maturing in April 2024, and SPV asset facility IV maturing in August 2029.
Subject to closing conditions, Owl Rock expects the notes offering to close on June 11. At the end of March 2021, Owl Rock’s investments in 120 portfolio companies had an aggregate value of $11.2bn.
It is expected that US policymakers will take more aggressive actions to ensure that banks remain well-capitalised.
This will ensure that banks can continue to play their critical roles as providers of credit to the economy, both during the ongoing public health emergency, and once the health emergency ends and it is safe to resume normal economic activities.
