Banks were, no doubt, busy in March. On the corporate lending side, estimates of how much corporate borrowers had utilized their revolving credit facilities by the beginning of April hovered around $200 billion – an amount JPMorgan estimated to be 77 percent of total facility capacity at the time. Sponsors asked for, and drew heavily on, SCF qualified borrower joinders, effectively downstreaming the proceeds to liquidity-starved portfolio companies.
Banks’ first-quarter earnings reports showed a simultaneous surge in demand for credit of all kinds, even as banks posted stunning increases in loan loss provisions. The top 15 US banks saw 12 percent loan growth year-on-year in the first quarter, according to S&P Global. The top seven banks posted some $27 billion in loan loss reserves.
“If you’re a UK bank… you’re going to be under a lot of political and internal pressure to make sure you’re funding the UK economy”
Anonymous risk manager
As the pandemic intensified, demand for SCFs was pulled forward from the second quarter into March. Borrowers wanting to get ahead of any liquidity crunch or upward move in pricing looked to close on extensions, refinancings and new lines. Many obtained or used existing qualified borrower joinders, drawing on their lines and downstreaming the proceeds to struggling portfolio companies.
“March was one of the busiest months in the space, not just for us but for virtually every lender in the market,” says Wells Fargo’s Johnston. That continued into April as it became clear the landscape had definitively shifted.
“There’s been a huge rush to close deals by today,” said one UK-based lawyer at the end of April. “One deal we did recently, if it had not been completed by today, there would definitely have been a repricing and a recasting of terms, and who knows whether the deal maybe would have gone away.”
All those new commitments caused some banks to hit product or concentration limits, says Michael Mascia, partner at Cadwalader, Wickersham & Taft. “In this environment banks aren’t that likely to increase a particular risk maximum,” he says. “Other parts of banks – ie, the corporate lending areas – were drawn so heavily in March as the crisis commenced that it does stress overall liquidity positions, which has made banks slow down new lending a little bit.”
Focus shifts inward
Key lenders in the market began focusing on core relationships and examining their exposures immediately in mid-March. Some felt increasing pressure to keep new lending domestic. “If you’re a UK bank, and you’re getting European fund managers looking for funding, you’re going to be under a lot of political and internal pressure to make sure you’re funding the UK economy,” one London-based risk manager whose bank is highly active in sub lines said at the time.
A banker on that institution’s SCF platform said in April: “We’re not doing every deal that comes through our door. Now, we’re focused on servicing the needs of our customers.” That sentiment was echoed throughout April, May and into June by most of the banks Private Funds CFO spoke to.
“We’re not doing every deal that comes through our door. Now, we’re focused on servicing the needs of our customers.”
SCF platform banker
“There’s definitely some banks focused on their existing clients and portfolio and that are no longer chasing new clients and new loans,” Mascia said in late April. (He and other fund finance lawyers and bankers reported being very busy with deals throughout Private Funds CFO’s reporting, while agreeing some banks were not engaging in new lending, thereby illustrating a perhaps active, but fractured, market.)
Other, smaller players eagerly rushed in to absorb the overflow in demand. “Some banks are pulling back, but then there are other banks that are coming into that void,” says Mary Touchstone, head of the fund finance practice at Simpson, Thacher & Bartlett.
Players from various corners of the market repeatedly singled out banks traditionally seen as smaller players, passive participants, or servicing specific market segments, as showing up on deals they might not have been able to compete for previously. Banks like Silicon Valley Bank (especially in Europe, according to one source), First Republic and Signature – which last year hired two managing directors from Wells Fargo’s sub line business – were cited most often.
Of course, a pullback from some lenders in an economic crisis is not a huge surprise. “It’s a little bit inevitable,” said Matt Hansford of Investec in May. “If you look at the prior crisis, most banks in Europe stepped away from this kind of lending.” But he added: “It’s also one of the asset classes where money comes back quicker… If you’re a bank looking for liquidity you can shut off the tap, and the capital flows back into the bank because you get repayment paydowns and renewals of facilities.”
That may yet be the case for some banks. But there is a sense among market participants that more lasting challenges may be at play for some lenders.
Banks are facing a variety of difficulties, as in any down market, and SCF businesses sit in different places at different banks – within securitization, corporate or real estate lending, or private banking, for example – so the combination of causes behind a slowdown or halt in new lending varies between them.
This is Part 2 in a seven-part series. Stay tuned for more on Secondaries Investor.