Ordinary loan transactions put to the test as bank capital becomes tight

(Bloomberg) — Equity Residential, one of the largest apartment owners in the U.S., usually finds refinancing a bank loan easy. It was a long trip this year.

For the company’s $2.5 billion backup credit line, known as Revolver, lenders have historically treated the process like a procedural or administrative task, chief financial officer Robert Galechana said in an interview. This time there was even more discussion, often focused on what kind of business the bank would get from the company.

“I could feel the constraints facing banks,” he said.

Garechana said the lenders weren’t worried about Equity Residential’s overall financial situation. S&P Global Ratings has consistently rated the company’s major divisions in the investment grade category of A-. However, because revolvers tend to have lower fees, banks see revolvers primarily as a way to get more profitable businesses such as bond underwriting.

With the Federal Reserve raising interest rates and the threat of a recession looming, many banks have been thinking more seriously about who to offer this type of loan this year. Demand for credit remains relatively high. U.S. commercial bank loans are up about 7% since March, according to Fed data.

capital increase

But lenders are also facing more risks, and regulators have put pressure on them to carefully consider their future capital requirements. The Federal Reserve (Fed) stress-tests banks once a year to see how they perform during difficult economic and market times. This year’s test has unexpectedly increased capital buffer requirements for banks such as JPMorgan Chase & Co. and Citigroup Inc.

Allison Williams, senior banking analyst at Bloomberg Intelligence, said banks also face higher capital requirements due to different types of buffers related to their status as global systemically important banks. Said there was

“In a very short period of time, they have had to strengthen their capital to exceed these new requirements, so in order to sustain their balance sheet ahead of these increases, they have made their terms on commercial lending more stringent. I did,” Williams said.

With many banks meeting current requirements, pressure on corporate lending could ease through the year, Williams said.

It was clear to Equity Residential that banks were looking at broader capital requirements and asking more questions before lending to companies, Garechana said.

“If you are having this level of conversation, it should be much more difficult for non-investment grade companies, or companies with lower investment grade quality,” he added.

Representatives for Bank of America, which acted as managing agent for Revolver, and JPMorgan and Wells Fargo, which participated as co-bookrunners, declined to comment.

3 reasons

Overall, according to Galechana, there are three reasons why banks are paying extra attention. First, the tightening regulatory environment has increased capital requirements.

The second reason is the increased demand for loans from banks in recent months. Many companies that were unable to borrow at reasonable rates in the investment grade or junk bond markets decided to take out bank loans instead, tying up lenders’ balance sheets. Additionally, the market for real estate loans packaged into bonds and sold to outside investors has cooled, forcing banks to hold more of these loans.

Third, some foreign banks, especially those without local dollar deposits, find it difficult to commit to lending in the United States because the US dollar is so strong against their home currency.

Two international banks based in other countries dropped out of Revolver during the refinancing process, according to public documents. French bank BNP Paribas SA and Japan’s Sumitomo Mitsui Banking Corporation, a unit of Sumitomo Mitsui Financial Group. In addition to BNP and SMBC, US regional bank Fifth Third Bancorp also left the group. Galechana said the company still has good relationships with banks and that “the bridge is not burned down.” Finally, in October, he had 19 banks join his Equity Residential’s latest revolver.

Representatives for BNP and Fifth Third declined to comment. SMBC officials did not respond to a request for comment.

holding cash

Banks think about capital, and so do many business executives. Property billionaire Sam Zell, founder and chairman of Equity Residential, said in an interview with CNBC on Thursday that he has more cash and sees a recession more likely. I said yes. He also talked about the challenges of refinancing revolvers.

One piece of evidence that banks aren’t concerned about the creditworthiness of equity residential is the fees they pay on refinanced loans. Real estate investment trusts are still paying 12.5 basis points a year just to have a revolver, just like they used to. The funds used will be paid at the Secured Overnight Financing Rate plus 72.5 basis points. This is 77.5 basis points above the rate offered by the London interbank on previous loans. The company has also added features related to sustainability.

–With help from James Crombie and Patrick McHale.

© 2022 Bloomberg LP

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