Bloomberg News

BofA Beating JPMorgan as BNP Leads French Lenders Retreat

June 14, 2012

BofA Beating JPMorgan After French Lenders Retreat

European banks are borrowing for three to five years at an average of 200 to 300 basis points over Euribor, the rate at which banks say they see each other lending in euros, said Shaun Dreyer, the head of Bank of America’s EMEA syndicated loan capital markets in London. Photographer: David Paul Morris/Bloomberg

Bank of America Corp. (BAC:US) overtook JPMorgan Chase & Co. (JPM:US) as the biggest lender to the commodities industry in the first five months as French lenders led by BNP Paribas SA (BNP) retreated amid the debt crisis.

Commodity loans arranged by Charlotte, North Carolina-based Bank of America totaled $14.71 billion, and New York-based JPMorgan’s $14.41 billion ranked it second, according to syndicated-loan data compiled by Bloomberg. Citigroup Inc. (C:US) was the third biggest with $13.68 billion of financing, rising from fourth last year. BNP Paribas slipped to 17th from second.

Combined lending tumbled 16 percent to $229.7 billion as commodities fell to within a percentage point of a bear market on concern that slower growth will curb demand. BHP Billiton Ltd. (BHP), the world’s biggest mining company, said last month it will restrain spending. European banks are selling assets and trimming loans to bolster their capital as the region’s debt crisis worsens and economies slide back into recession.

“We’ve seen commodity prices come down and this does affect the companies’ capital plans,” said Peter Archbold, the London-based head of basic materials at Fitch Ratings Ltd. “The mining sector, as many others, is also suffering from a general pullback in lending, in particular by the French banks. Banks aren’t able to offer the same volume of lending.”

The Standard & Poor’s GSCI gauge of 24 commodities fell 19 percent from a nine-month closing high on Feb. 24, led by natural gas, coffee and sugar. The index gained 0.6 percent today. The MSCI All-Country World Index of equities retreated 9 percent as the 152-member Bloomberg Banks Index declined 14 percent and the Bloomberg World Mining Index of 140 companies slid 21 percent. Treasuries returned 2.2 percent, a Bank of America index shows.

Credit Lines

Societe Generale SA (GLE), France’s second-largest bank, fell to 24th through the end of May, from 11th a year earlier. The figures, compiled at 8 a.m. in London yesterday, reflect transactions involving more than one bank and include credit lines, project or term loans and trade finance. Officials from Societe Generale and JPMorgan declined to comment.

Banks in the 17-nation euro region are lending less after pledging to cut more than 950 billion euros ($1.2 trillion) of assets to meet new regulations including from the Basel Committee on Banking Supervision, known as Basel III. BNP Paribas, France’s biggest bank by assets, Societe Generale and Montrouge, France-based Credit Agricole SA (ACA) are shrinking assets by at least 300 billion euros to comply with the new rules after writing off losses from Greece’s sovereign-debt crisis.

Interest Payments

“Commodity companies are largely dollar-based borrowers so European banks have a slight natural disadvantage since they don’t have the dollar deposit base like U.S. banks,” said Ashu Khullar, the London-based co-head of Europe, Middle East and Africa loan structuring and syndication at Citigroup. “French banks, which were traditionally strong in trade finance, will probably try hard to maintain a strong presence in the sector despite the dollar constraints.”

European banks’ share of lending to the global commodity business has declined faster than other regions, said Charlotte Conlan, the head of origination and sales for loan syndications for EMEA at BNP Paribas in London.

European banks are borrowing for three to five years at an average of 200 to 300 basis points over Euribor, the rate at which banks say they see each other lending in euros, said Shaun Dreyer, the head of Bank of America’s EMEA syndicated loan capital markets in London. A syndicated loan to a company rated between BBB+ and BBB-, the lowest investment grade, is priced at about a 100 basis-point premium, which only makes sense if the bank can derive extra income from additional services, he said.

Funding Alternatives

“We do see some commodity companies willing to have banks with less expertise in the sector as their lenders, in order to have more funding alternatives,” said Rui Florencio, head of energy commodities for Europe, Commonwealth of Independent States and West Africa at ABN Amro Bank NV in Amsterdam. “Nowadays you never know which banks are going to tell you they will decrease lending,”

Banks are finding new ways of funding trade finance by expanding the sources of capital. They plan to package loans into securities that can be sold to investors including pension or sovereign funds and insurance companies, according to Jacques-Olivier Thomann, the president of the Geneva Trading and Shipping Association. The first such transactions may come as early as this summer, he said.

Switching Currencies

“The market is always finding new solutions,” said Thomann, who was the global head of structured finance for BNP Paribas’s Swiss unit until April and remains an adviser to the company. “We’ve seen a few loans switched from dollars to euros. We’ve seen also change to the market practices, for example traders selling to refineries decide to shorten the terms of payment, decreasing the need for credit line.”

Extra financing is also coming from commodity companies. Trafigura Group, the third-biggest independent oil trader, increases funding to commercial partners when financing gets scarce, according to Pierre Lorinet, chief financial officer of the Amsterdam-based company.

Vitol Group, the Swiss oil trader that had sales of almost $300 billion in 2011, agreed in March to provide as much as $20 million of funding to Beacon Hill Resources Plc, which produces coal in Mozambique. RK Capital Management LLP, a London-based hedge fund company, now has $700 million of assets in its group of funds that provide financing to mining companies, from $300 million a year ago.

RK Capital

“With the traditional sources of financing currently of limited utility, alternative sources are growing and offsetting the drop in bank lending,” said Oskar Lewnowski, an RK Capital partner based in New York. “They are becoming more important to the community, and a more accepted way of financing.”

The average interest rate banks charge for loans to commodity companies has risen to 318 basis points more than benchmark lending rates, from 275 basis points in 2011, according to data compiled by Bloomberg.

Noble Group Ltd., Asia’s biggest publicly held commodities trader by sales, was able to borrow a total of $2.36 billion in May at 130 and 220 basis points over benchmark rates.

BHP said May 16 it won’t meet its five-year $80 billion spending target for building mines and expanding operations as commodity prices decline. The Melbourne-based producer’s gross debt at the end of 2011 was $25 billion, including a $4 billion credit line, according to the company’s website. Ruban Yogarajah, a spokesman in London, declined to comment.

BHP Profit

The company will report a 22 percent decline in net income to $18.4 billion in its fiscal year ending June 30, the mean of 20 analyst estimates compiled by Bloomberg shows. Shares of BHP fell 26 percent in the past year in Australian trading.

BHP, Rio Tinto Group, Xstrata Plc, Glencore International Plc and Anglo American Plc may spend a combined $200 billion on building new production over the next five years, Liberum Capital Ltd.’s London-based analysts Dominic O’Kane and Richard Knights wrote in a report last month.

“Charging more for loans and lending less would inevitably be the routes most banks choose to improve their capital ratio,” said Dreyer of Bank of America. “Commodity players are huge users of banks’ capital so European banks will have to make some choices in terms of where they deploy their capital. Loan pricing will have to rise even for big commodity players.”

To contact the reporters on this story: Maria Kolesnikova in London at mkolesnikova@bloomberg.net; Patricia Kuo in London at pkuo2@bloomberg.net

To contact the editor responsible for this story: Faris Khan at fkhan33@bloomberg.net


Cash Is for Losers
LIMITED-TIME OFFER SUBSCRIBE NOW
 
blog comments powered by Disqus