Category Archives: Banking

“Stop The Revolver Run”: Cash-Strapped Banks Quietly “Discourage” Companies From Drawing Down Their Loans

One week after the Fed expanded its “bazooka” by launching a “nuclear bomb” in the words of Paul Tudor Jones , at fixed income capital markets which it has now effectively nationalized by monetizing or backstopping pretty much everything, some signs of thaw are starting to emerge in the all important commercial paper market, where the spread to 3M USD OIS is finally starting to tighten, coming in by 60bps overnight.

But while the move will be welcomed by companies in dire need of short-term funding, it is nowhere near enough to unfreeze the broader commercial paper market, with the spread still precipitously high even for those companies that have access to commercial paper, which is why most companies continue drawing down on revolvers.

As ZeroHedge reported over the weekend, according to JPMorgan calculations, aggregate corporate revolver draw downs represent 77% of the total facilities, with JPM noting that the total amount of borrowing by companies is likely significantly greater than this, well above 80%, as it only reflects disclosed amounts by large companies, and there are likely undisclosed borrowings by middle market companies.

In nominal terms, this means that corporates that have tapped banks for funding has risen further to a record $208 billion on Thursday, up $15 billion from $193 billion on Wednesday and $112BN on Sunday. That’s right: nearly $100 billion in liquidity was drained from banks in the past week; is there any wonder the FTA/OIS has barely eased indicating continued tensions in the interbank funding market.

Yet the bigger problem remains: with banks already pressed for liquidity, they are suffering a modern-day “bank run”, where instead of depositors pulling their money, corporations are drawing down on revolvers at unprecedented levels, something we first described three weeks ago “Banking Crisis Imminent? Companies Scramble To Draw Down Revolvers.”

Of course, at the end of the day, liquidity is liquidity, and banks are starting to fear when and if this revolver run will ever end, and just how much liquidity they need to provision, especially since many of these companies will have to file for bankruptcy in the coming months, sticking banks with a pre-petition claim (albeit secured).

As a result, and as Bloomberg reports, the biggest U.S. banks have been quietly discouraging some of America’s safest borrowers from tapping existing credit lines amid record corporate draw downs on lending facilities.

as Bloomberg notes, investment-grade revolvers, “especially those financed in the heyday of the bull market,” are a low margin business, and some even lose money. The justification is that they help cement relationships with clients who will in turn stick with the lenders for more expensive capital-markets or advisory needs. While this is fine under normal circumstances when the facilities are sporadically used, “with so many companies suddenly seeking cash anywhere they can get it, they’re now threatening to make a dent in banks’ bottom lines.

The second issue is more nuances: while Bloomberg claims that the draw down wave “is not an issue of liquidity for Wall Street” we disagree vehemently, and as proof of strained bank liquidity we merely highlight the fact that after $12 trillion in monetary and fiscal stimulus has been injected, it has failed to tighten the critical FRA/OIS spread which remains at crisis levels.

The good news is that at least some corporations – those who have the most alternatives – are willing to oblige bank requests, turning instead to new, pricier term loans or revolving credit lines rather than tapping existing ones. “McDonald’s  last week raised and drew a $1 billion short-term facility at a higher cost than an existing untapped revolver” Bloomberg notes, adding that while rationales will vary from borrower to borrower, analysts agree that for most, staying in the good graces of lenders amid a looming recession is important.

The bad news is that most companies remain locked out of other liquidity conduits – be they new credit facilities, or commercial paper – and are thus forced to keep drawing down on existing lines of credit, which puts bankers – especially relationship bankers – in a very tough spot.

“The banker is coming at it trying to manage two things — the relationship profitability and their portfolio of risks and assets,” said Howard Mason, head of financials research at Renaissance Macro Research. “Bankers have some cards to play because they can talk to their clients that have undrawn credit lines. The sense is that there’s a relationship involved so relationship pricing and good will applies.”

Meanwhile, as banks quietly scramble to raise liquidity of their own – because, again, liquidity is always and everywhere fungible – U.S. financial institutions have sold almost $50 billion of bonds over the past two weeks to bolster their coffers, ironically even as corporate bankers are advising companies not to hoard cash unless they urgently need it. Some are even telling certain clients to hold off on seeking new financing to avoid over-stressing a system already stretched to its limits operationally as bankers are inundated with requests while stuck at home due to the coronavirus pandemic.

“The banks are open but if everybody asks at the same time then it’s going to be difficult from a balance sheet perspective,” Bloomberg Intelligence analyst Arnold Kakuda said in an interview.

Kinda like the whole fractional reserve concept: banks have money in theory… as long as not all of their depositors demand to withdraw money at the same time. With revolvers, it more or less the same thing.

“The corporate banker doesn’t want everybody to take a hot shower at the same time in the house,” said Marc Zenner, a former co-head of corporate finance advisory at JPMorgan Chase & Co. “They want to use their capital where it’s most beneficial.”

Amusingly, even McDonald – right after it signed a new revolver – immediately tapped the full $1 billion as a “precautionary measure” to reinforce its cash position, the company said in a regulatory disclosure Thursday. It also priced $3.5 billion of bonds last week as part of its broader liquidity management strategy.

In short, it’s a liquidity free for all, and the bottom line is simple: those bigger companies that still have access to liquidity will survive; those that are cut off, will fail, giving the bigger companies even greater market share, and crushing the small and medium businesses across America.

As a result, the prevailing thinking across corporate America is is “it’s ‘better safe than sorry,” said Jesse Rosenthal, an analyst at CreditSights Inc. “They might believe with all their hearts that the bank has all the liquidity they need, but it’s just fiduciary duty, due diligence, and prudence in a totally unprecedented situation.” Ironically, we reported last week that a bankrupt energy company, EP Energy, listed a trolling risk factor in its annual report, in which the company mused that it may be challenged if one or more of its lender banks collapsed.

Meanwhile, confirming that this latest freak out is all about liquidity, bankers are now including provisions in new deals that ensure they’ll be among the first to be paid back when companies regain access to more conventional sources of financing, according to Bloomberg sources.

And for those insisting on drawing down revolvers now, Renaissance Macro’s Mason says banks will ultimately seek to recoup the costs down the line.

“The message to corporate clients is, ‘you can continue to do this, but we are looking at profitability on a relationship business, so if we don’t make our hurdles here we need to make them somewhere else,’” Mason said. Of course, those companies which have already drawn down on their revolvers and/or have anything to do with the energy sector… see you after you emerge from Chapter 11.

Source: ZeroHedge

 

Did President Trump Just Nationalize The Federal Reserve Bank?

WAR WITH THE INTERNATIONAL BANKING CARTEL? OR NESARA?

Tucked in the $2 trillion coronavirus stimulus bill passed by Congress is a curious provision that essentially outlines how the Treasury and the Federal Reserve will merge into one organization. Is this President Trump’s way of taking back America’s monetary sovereignty, or is it a smokescreen that expands the Fed’s power?

Source: by Greg Reese | InfoWars

Real Money Becoming Unaffordium & Unobtainium

Informative And Educational:

Are gold and silver becoming what Mike Maloney has always suggested, Unaffordium and Unobtainium? The last few weeks have given us a preview of how stretched the physical gold and silver markets can become when the markets move. Join Mike as he welcomes GoldSilver.com President Alex Daley for a special Retail Bullion Update.

This Goose Is Cooked: “I’ve Never, Ever, Ever Seen Anything Like This Before”

“You have enormous buyers of debt meeting massive coordinated fiscal stimulus by governments across the globe. For bond investors, you’re caught between a rock and a hard place.”

With the Fed buying $622 billion in Treasury and MBS, a staggering 2.9% of US GDP, in just the past five days…

… any debate what to call the current phase of the Fed’s asset monetization – “NOT NOT-QE”, QE4, QE5, or just QEternity – can be laid to rest: because what the Fed is doing is simply Helicopter money, as it unleashes an unprecedented debt – and deficit – monetization program, one which is there to ensure that the trillions in new debt the US Treasury has to issue in the coming year to pay for the $2 (or is that $6) trillion stimulus package find a buyer, which with foreign central banks suddenly dumping US Treasuries

… would otherwise be quite problematic, even if it means the Fed’s balance sheet is going to hit $6 trillion in a few days.

The problem, at least for traders, is that this new regime is something they have never encountered before, because during prior instances of QE, Treasuries were a safe asset. Now, however, with fears that helicopter money will unleash a tsunami of so much debt not even the Fed will be able to contain it resulting in hyperinflation, everything is in flux, especially when it comes to triangulating pricing on the all important 10Y and 30Y Treasury.

Indeed, as Bloomberg writes today, core investor tenets such as what constitutes a safe asset, the value of bonds as a portfolio hedge, and expectations for returns over the next decade are all being thrown out as governments and central banks strive to avert a global depression.

And as the now infamous “Money Printer go Brrr” meme captures so well, underlying the uncertainty is the risk that trillions of dollars in monetary and fiscal stimulus, and even more trillions in debt, “could create an eventual inflation shock that will trigger losses for bondholders.”

Needless to say, traders are shocked as for the first time in over a decade, they actually have to think:

“You have enormous buyers of debt meeting massive coordinated fiscal stimulus by governments across the globe. For bond investors, you’re caught between a rock and a hard place.”

And while equity investors may be confident that in the long run, hyperinflation results in positive real returns if one sticks with stocks, the Weimar case showed that that is not the case. But that is a topic for another day. For now we will focus on bond traders, who are finding the current money tsunami unlike anything they have seen before.

Indeed, while past quantitative easing programs have led to similar concerns, this emergency response is different because it’s playing out in weeks rather than months and limits on QE bond purchases have quickly been scrapped.

Any hope that the Fed will ease back on the Brrring printer was dashed when Fed Chairman Jerome Powell said Thursday the central bank will maintain its efforts “aggressively and forthrightly” saying in an interview on NBC’s “Today” show that the Fed will not “run out of ammunition” after promising unlimited bond purchases. His comments came hours after the European Central Bank scrapped most of the bond-buying limits in its own program.

The problem is that while this type of policy dominates markets, fundamental analysis scrambling to calculate discount rates and/or debt in the system fails, and “strategic thinking is stymied and some prized investment tools appear to be defunct”, said Ronald van Steenweghen of Degroof Petercam Asset Management.

“Valuation models, correlation, mean reversion and other things we rely on fail in these circumstances,” said the Brussels-based money manager. Oh and as an added bonus, “Liquidity is also very poor so it is difficult to be super-agile.”

The irony: the more securities the Fed soaks up, be they Treasuries, MBS, Corporate bonds, ETFs or stocks, the worse the liquidity will get, as the BOJ is finding out the hard way, as virtually nobody wants to sell their bonds to the central bank.

Another irony: normally the prospect of a multi-trillion-dollar government spending surge globally ought to send borrowing costs soaring. But central bank purchases are now reshaping rates markets – emulating the Bank of Japan’s yield-curve control policy starting in 2016 – and quashing these latest volatility spikes.

In effect, the Fed’s takeover of bond markets (and soon all capital markets), means that any signaling function fixed income securities have historically conveyed, is now gone, probably for ever.

“Investors shouldn’t expect to see much more than moderately steep yield curves, since the Fed and its peers don’t want higher benchmark borrowing costs to undermine their stimulus,” said Blackrock strategist Scott Thiel. “That would be detrimental to financial conditions and to the ability for the stimulus to feed through to the economy. So the short answer is, it’s yield-curve control.”

Said otherwise, pretty soon the entire yield curve will be completely meaningless when evaluating such critical for the economy conditions as the price of money or projected inflation. They will be, simply said, whatever the Fed decides.

And with the yield curve no longer telegraphing any inflationary risk, it is precisely the inflationary imbalances that will build up at an unprecedented pace.

Additionally, when looking further out, Bloomberg notes that money managers need to reassess another assumption that’s become widely held in recent years: that inflation is dead. Van Steenweghen says he’s interested in inflation-linked bonds, though timing a foray into that market is “tricky.”

Naeimi also said he expects that the coordination by central banks and governments will spike inflation at some stage. “It all adds to the volatility of holding bonds,” he said. But for the time being, he’s range-trading Australian bonds — buying when 10-year yields hit 1.5%, and selling at 0.6%.

That’s right: government bonds have become a daytrader’s darling. Whatever can possibly go wrong.

But the biggest fear – one we have warned about since 2009 – is that helicopter money, which was always the inevitable outcome of QE, will lead to hyperinflation, and the collapse of both the US Dollar, and the fiat system, of which it is the reserve currency. Bloomberg agrees:

Many market veterans agree that faster inflation may return in a recovery awash with stimulus that central banks and governments may find tough to withdraw. A reassessment of consumer-price expectations would be a major setback for expensive risk-free bonds, especially those with the longest maturities, which are most vulnerable to inflation eroding their value over time.

Of course, at the moment that’s hard to envisage, with market-implied inflation barely at 1% over the next decade, but as noted above, at a certain point the bond market no longer produces any signal, just central bank noise, especially when, as Bloomberg puts it, “central bank balance sheets are set to explode further into unchartered territory.” Quick note to the Bloomberg editors: it is “uncharted”, although you will have plenty of opportunity to learn this in the coming months.

Alas, none of this provides any comfort to bond traders who no longer have any idea how to trade in this new “helicopter normal“, and thus another core conviction is being revised: the efficacy of U.S. Treasuries as a safe haven and portfolio hedge.

Mark Holman, chief executive and founding partner of TwentyFour Asset Management in London, started questioning that when the 10-year benchmark hit its historic low early this month.

“Will government bonds play the same role in your portfolio going forward as they have in the past?” he said. “To me the answer is no they don’t — I’d rather own cash.”

For now, Mark is turning to high-quality corporate credit for low-risk income, particularly in the longer maturity bonds gradually rallying back from a plunge, especially since they are now also purchased by the Fed. He sees no chance of central banks escaping the zero-bound’s gravitational pull in the foreseeable future. “What we do know is we’re going to have zero rates around the world for another decade, and we’re going to have the need for income for another decade,” he said.

Other investors agree that cash is the only solution, which is why T-Bills – widely seen as cash equivalents – are now trading with negative yields for 3 months and over.

Yet others rush into the safety of gold… if they can find it. At least check, physical gold was trading with a 10% premium to paper gold and rising fast.

Ultimately, as Bloomberg concludes, investors will have to find their bearings “in a crisis without recent historical parallel.”

“It’s very hard to look at this in a historical context and then apply an investment framework around it,” said BlackRock’s Thiel. “The most applicable period is right before America entered WW2, when you had gigantic stimulus to spur the war effort. I mean, Ford made bombers in WW2 and now they’re making ventilators in 2020.”

Welcome to the New America

Source: ZeroHedge

“It’s Safe!” – FDIC Urges Americans To Keep Their Money In Banks

Yesterday the Chair of the FDIC released an astonishing video asking Americans to keep their money in the bank.

Accompanied by soft piano music playing in the background, the official said:

“Your money is safe at the banks. The last thing you should be doing is pulling your money out of the banks thinking it’s going to be safer somewhere else.”

(Simon black) Amazing. I was half expecting her to waive her hand and say, “These aren’t the droids you’re looking for…”

As I’ve written before, there’s $250 TRILLION worth of debt in the world right now: student debt, housing debt, credit card debt, government debt, corporate debt, etc.

And let’s be honest, some of that debt is simply not going to be paid.

Millions of people have already lost their jobs. Millions more (like the 10 million waiters and bartenders across America) are barely earning anything right now because their businesses are closed.

The government has already suspended evictions and foreclosures, which is a green light for people to stop paying the rent or mortgage.

And that means banks will take it in the teeth.

This is what happened back in 2008– millions of people across the country stopped paying their mortgages, and the banking system nearly collapsed as a result.

Today it’s a similar situation; a lot of people are going to stop paying their mortgages, credit cards, auto loans, etc. And that directly impacts the banks.

Businesses are in deep financial trouble too.

According to the Wall Street Journal, the median small business in the United States has a cash balance that will last them just 27 days.

And many are operating with an even smaller safety net; the median restaurant, for example, has a cash balance of just 16 days.

These businesses have been told to close down due to the Corona Virus. And it’s likely that many of them will never re-open.

A lot of these companies also have debt. And if they close, those debts will never be repaid.

Even big businesses are susceptible to failure.

Every airline, cruise ship operator, hotel, retail chain, etc. is on the ropes, and each of these companies has borrowed billions of dollars.

This pandemic could easily push several big companies into bankruptcy.

You probably know that old saying– if you owe the bank a million dollars and can’t pay, you have a problem. If you owe the bank a billion dollars and can’t pay, the bank has a problem.

That’s what we’re seeing now.

Countless unemployed individuals, millions of shuttered small businesses, and bankrupt big companies collectively owe the banks trillions of dollars. And many of them can’t pay… which means the entire banking system has a problem.

How much money will the banks lose because of this pandemic?

It could easily end up being hundreds of billions of dollars, even several trillion dollars.

No one knows. But it’s not going to be zero. It’s silly to think that banks are immune to the Corona virus, or to assume that not a single bank is going to run into problems.

Don’t get me wrong– I’m not saying that the banking system is about to collapse. There are stronger banks and weaker banks. Many of them will survive, others will fail.

What I am saying is that there are enormous and obvious risks that threaten the banking system.

As I’ve written several times over the past few weeks: Anyone who says, “No, that’s impossible,” clearly doesn’t have a grasp of what’s happening right now. EVERY scenario is on the table, including severe problems in the banking system.

But the FDIC insists that there’s nothing to worry about.

That’s ridiculous. The FDIC only has $109 billion to insure the entire $13 trillion US banking system. That’s less than 1%!

The FDIC also insists that they’ve always been able to prevent depositors from losing money. “Not a single depositor has lost money since 1933.” And that’s true.

But they’ve never had to deal with this before. Neither the FDIC, nor any bank, has ever had to deal with a complete shutdown of the economy… or potential losses of this magnitude.

The Covid-19 impact on the banking system could be 10x bigger than the housing meltdown in 2008.

If the pandemic ends up causing trillions of dollars of loan losses, the FDIC won’t have enough ammunition to fix it… and that doesn’t even consider trillions of dollars more in potentially toxic derivatives exposure.

So to casually brush off these risks and claim that everything is 100% safe seems incomprehensible.

It also raises an interesting point: why is the FDIC asking us to NOT withdraw our savings?

If the financial system is so safe, it shouldn’t matter to them whether or not people keep their money in the banks.

Yet they still felt the need to specifically ask people to NOT withdraw their money… and tell us that we shouldn’t keep cash at home.

I’ll reiterate a point that we’ve made again and again at Sovereign Man over the years: it makes sense to have some physical cash in an at-home safe.

I’m not suggesting you keep your life’s savings in physical cash. But a month or two worth of expenses won’t hurt.

There’s very little downside– your bank probably only pays you 0.01% anyhow, so it’s not like you will be giving up a ton of interest income.

And given that the FDIC is specifically saying that you shouldn’t do this, a prudent person might wonder what’s really going on.

Source: by Simon Black | ZeroHedge

Physical Silver Supply Squeeze About To Get Worse Warns Miner Executive, Keith Neumeyer

The global pandemic has shut down several mining jurisdictions around the world, taking off a large chunk of silver production, this according to Keith Neumeyer, CEO of First Majestic Silver. “In 2018, we produced, as a global industry, 855 million ounces of silver. So far, we’ve had Peru come offline, with 145 million ounces, we’ve had Chile come offline with 42 million ounces, we’ve had Argentina come offline with 26.5 million ounces. That’s a total of 213.5 million ounces that has now been shut down,” Neumeyer told Kitco News.

Discount silver bullion dealers via the internet are all out of stock, as of this writing, leaving us to explore retail silver price discovery via eBay auction for bargains today:

Monster Box
Eagles
Junk

VS,

Melt Value LIve

A Revolving Panic: Here Are The Companies That Fully Drew Down Credit Lines Last Week

In the aftermath of the great Commercial Paper panic of 2020, which erupted over the past two weeks when initially the Fed failed to launch a Commercial Paper backstop facility, something it did with a two day delay on Tuesday, countless blue chip (and less than clue chip) companies found themselves with gaping liquidity shortfalls, and to bridge their funding needs, they rushed to draw on their existing credit facilities (also a hedge in case the banking system imposes a lending moratorium similar to what happened in the 2008 crash).

As a result, corporate borrowers worldwide, including Boeing, Hilton, Wynn, Kraft Heinz and dozens more, drew about $60 billion from revolving credit facilities this week in a frantic dash for cash as liquidity tightens.

On Wednesday alone, another seven more companies – CEC Entertainment, Metropolitan Transportation Authority, Diamondrock Hospitality, Tailored Brands, J Jill, Boyd Gaming, and National Vision – announced intentions to draw down credit lines.

As of Friday morning, the week recorded $58BN of draw downs, more than a five-fold jump from the $11BN for the whole of the previous week, according to Bloomberg data. The total drawdown would bring the utilization ratio above 24%, double from the 12% as of 4Q19 for US Investment Grade companies.

Thursday alone saw $21BN of facilities drawn, just short of the $21.3BN recorded on Tuesday, with Ford ($15.4BN), Kohl’s ($1BN), TJX ($1BN) and Ross Stores leading the revolving charge.

What is concerning is that despite the Fed’s CP backstop, companies continue to draw down on revolvers, whether because the rate on their CP is too high, or they simply do not trust banks.

The BofA table below summarizes all the companies that have drawn down on their revolver in response to the the Global Corona/Crude Crisis…

… and here is pipeline of upcoming deals, via Bloomberg.

Source: ZeroHedge