April 14, 2016 / 2:02 PM / a year ago

Credit Suisse withdraws from Ally loan arrangement

5 Min Read

NEW YORK, April 14 (IFR) - Credit Suisse has withdrawn from an 18-bank group that provides a multi-billion dollar credit line for Ally Financial, one of the main US auto lenders, sources close to the matter told IFR.

CS failed to come to terms with Ally on a new US$11bn warehouse lending facility that was announced in March. Another bank, understood to be Canada's CIBC, also exited the group.

One source said increased costs for Credit Suisse due to new regulatory capital requirements were the obstacle to it reaching agreement on terms with Ally.

Yet the move also comes amid turmoil at Credit Suisse, whose CEO Tidjane Thiam has presided over nearly US$1bn in writedowns in the last two quarters that he said had caught him off-guard.

A source at a bank still in the warehouse said the withdrawal signaled that CS was ending the relationship under broader pressure to cut costs and stem losses.

"[The warehouse terms] worked for 16 other people," the banker said, referring to the other institutions still involved in providing the credit line.

"If everyone was fine with it except those guys, that's them pulling out."

But a person close to the situation said that the break with Ally was unrelated to Credit Suisse's losses and insisted the bank was not cutting back its structured finance business.

CS is "still fully committed and active" in the sector, the person said, noting that the bank had signed a number of other warehouse agreements already in 2016.

"There is zero retrenchment," he said.

Troubled Waters

Like many retail lenders, Ally relies on a so-called warehouse facility to fund loans that might otherwise use up too much of the lending bank's available capital.

Other banks pledge the money, which is typically repaid when the loans are bundled into a bond or asset-backed security and sold to investors.

Ally renegotiates its warehouse terms every year and had 18 banks, including Credit Suisse, provide a US$12.5bn credit line in the facility agreed in 2015.

The talks for this year's facility began in November, before the Credit Suisse losses were public but after Thiam, the CEO, announced sweeping cost-cutting measures in October.

At the time, Thiam called Credit Suisse's global credit and structured finance businesses "two ugly ducklings".

He merged the two groups in a second revamp in the spring after roughly US$980m in writedowns, due to illiquid positions held by traders in the two groups, had been announced.

But he tapped the heads of those divisions to co-lead a new merged entity, raising questions about who - if anyone - had been held accountable for the bank's eye-watering losses.

He also said he and other senior management had not known about those trading positions ahead of time - a claim that many observers said was implausible.

Market Share

Credit Suisse had been having trouble with many of its businesses since well before Thiam, who had only a minimal background in banking, took over as CEO last year.

"Their investment bank has been a real drag on income for a long time," Erin Davis, an analyst covering Credit Suisse at Morningstar, told IFR.

Investment banks tolerate losses on warehouse lending in the hope they will earn fees from ancillary business including underwriting bonds.

But new regulations put in place after the global financial crisis demand that banks commit more capital against their exposures, making it more expensive for them to do business.

Withdrawing from the warehouse could make it harder for Credit Suisse to win other business in the bond underwriting space.

"All banks are watching the bottom line," said another banker whose firm is still in the Ally warehouse.

"But these lines are gateways to other business. It will make it harder for [Credit Suisse] to win bond mandates."

Ally is the second-largest US issuer of auto loan ABS behind Ford Motor Credit Co. It also funds itself in the high-yield bond market.

Credit Suisse was mandated to underwrite several Ally ABS bonds last year but has not been on any of its deals so far in 2016, according to IFR data. (Reporting by Will Caiger-Smith; Editing by Shankar Ramakrishnan, Natalie Harrison, Jack Doran and Marc Carnegie)

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