Bloomberg News

Fed Says Dealer Easing of Hedge Fund Lending Terms Slows

October 11, 2011

(Updates with additional hedge fund terms in fifth paragraph.)

Oct. 11 (Bloomberg) -- The number of Wall Street dealers tightening financing rates offered to hedge funds outnumbered those easing as Europe’s debt crisis escalated, a Federal Reserve survey shows.

Almost 10 percent of dealers said they somewhat tightened financing rates and other pricing terms offered to hedge fund clients, compared with 4.8 percent that eased those conditions, according to the Fed’s quarterly survey, which questioned senior credit officers at 21 firms from June through August. Of the dealers surveyed, about 86 percent said pricing terms remained unchanged.

Dealers that largely eased lending terms for at least five quarters slowed the trend as concern intensified that Europe’s fiscal imbalances would infect the global banking system. More than three quarters of the respondents said the amount of resources and attention devoted to management of concentrated exposures to other banks and financial institutions had increased over the three-month period.

While overall credit terms offered to counterparties were little changed, the survey was “in contrast with the broad- based easing that had been seen since the inaugural survey in June 2010,” the Fed said in the report today.

The number of banks easing other terms to hedge funds, such as haircuts, still outnumbered those tightening, the Fed survey showed. For such terms, 9.5 percent of dealers tightened while 33.3 percent eased and 57.1 percent were unchanged, according to the Fed.

Company Credit Risk

The survey, which was conducted from Aug. 22 to Sept. 2, was the first since U.S. credit markets started deteriorating in July. A benchmark gauge of corporate credit risk had the biggest two-month jump in August and September since the period ended November 2008, when markets seized following the bankruptcy of Lehman Brothers Holdings Inc.

The Markit CDX North America Investment Grade Index, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, has soared 42.5 basis points to 134.5 basis points since June 30, according to index administrator Markit Group Ltd.

--Editors: Pierre Paulden, Mitchell Martin

To contact the reporter on this story: Shannon D. Harrington in New York at sharrington6@bloomberg.net

To contact the editor responsible for this story: Alan Goldstein at agoldstein5@bloomberg.net


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