Big banks park beat-up energy sector bonds in U.S. money funds

Fri Jan 9, 2015 5:55am EST
 
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By Tim McLaughlin

BOSTON (Reuters) - Big European and American banks have found a productive place to park the energy sector's most distressed debt: the $2.7 trillion U.S. money market industry.

Barclays Bank plc, Credit Suisse and Wells Fargo and others get overnight and short-term loans from companies that run money market mutual funds such as Fidelity Investments, BlackRock Inc, American Beacon and others. The banks use the money to fund long positions in securities or to cover short positions. For collateral, the funds are accepting the junk-rated bonds of beat-up energy companies.

Even though the value of the bonds are in free fall as oil prices plummet, the money funds readily accept the debt, because it's a way to generate above-market yields in an industry hurt by near-zero interest rates. In 2014, the average yield for taxable money fund investors was a paltry 0.01 percent. Banks currently have about $90 billion outstanding in short-term and overnight loans backed by riskier assets that include corporate debt and equities.

The exact amount of junk-rated energy debt used as collateral was not available. But more than a dozen of the sector's mostly highly distressed issuers, including QuickSilver Resources, Black Elk Energy, Halcon Resources, Samson Investment and Sidewinder Drilling Inc, have had their bonds used as collateral, according to recent fund disclosures.

These so-called "other repurchase agreements" generate above-market yields for the funds, ranging anywhere from 20 basis points to 50 basis points. In contrast, repo loans backed by safe U.S. Treasuries can generate yields of about 10 basis points and less, according to recent fund disclosures.

Most money fund assets are in Treasuries, certificates of deposit and government agency debt. But some jarring discoveries in the types of collateral money funds accept on short-term loans to big banks can be found by investors who dig through industry disclosures.

A money fund run by Morgan Stanley recently disclosed, for example, an $8.25 million repurchase agreement with Credit Suisse, which used bonds issued by Sidewinder Drilling as most of the collateral. As oil prices have tumbled, so has the value of Sidewinder's 2019 bonds, falling about 44 percent since early October.

Credit Suisse declined to comment.   Continued...

 
The skyline of the banking district is pictured in Frankfurt, October 21, 2014. REUTERS/Ralph Orlowski