(Reuters) - The falling value of loans to junk-rated companies could be a negative factor in fourth-quarter earnings for U.S. banks, analysts said.
“We know the trouble’s there but I think a tougher credit market is kind of factored in to a lot of the thinking,” said Sandler O‘Neill analyst Jeff Harte.
Analysts cautioned that any losses at this stage seem relatively small, and could be offset by gains in other parts of banks’ bond trading businesses, such as Treasuries trading.
Banks could also have hedges that reduce the impact of any losses from individual deals, they added. Specific, accurate estimates are hard to make, they said. Analysts have not been reducing bank earnings estimates in recent weeks as parts of the loan market have sputtered.
Underwriters led by Bank of America (BAC.N) and Morgan Stanley (MS.N) ended up postponing a $1.5 billion and a 760 million euro loan package to help finance Carlyle Group’s leveraged buyout of Veritas, a data storage business.
A $1.5 billion loan backing the acquisition of fashion department store operator Belk Inc by private equity firm Sycamore Partners also saw weak investor demand. The lending syndicate behind the loan, led by Morgan Stanley, sold it at a lower price than anticipated. Morgan Stanley and Bank of America declined comment.
Analysts on average forecast Morgan Stanley will earn 54 cents per share in the fourth quarter, excluding special items, according to Reuters Estimates, up from 39 cents a share in the same quarter a year earlier.
Sandler O‘Neill’s Harte said that if the Federal Reserve raises interest rates in December, interest-rate products like Treasuries should trade more actively, helping offset any losses in credit products including leveraged loans. If the Fed effect is weaker than expected, fixed income trading revenue could fall roughly 15 percent versus the third quarter, Harte said.
The overall market for loans to junk-rated companies, known as leveraged loans, is weaker as well. An index of the most frequently-traded 100 leveraged loans indicates average bids of about 96 cents on the dollar as of the end of the day Thursday, lower than at any time over the past 12 months, according to Thomson Reuters data.
Loans still to be syndicated are said to be struggling. The $14 billion pipeline includes two large buyout loans for software companies. One is a $2.2 billion deal for software maker Solera Energy, which also includes bonds and has been solely underwritten by Goldman Sachs. The other is a $2.025 billion deal for software company SolarWinds, which is underwritten by Goldman Sachs, Credit Suisse, Macquarie and Nomura. Those deals are now expected to be syndicated next year, a senior loan investor told Reuters.
Whether banks unload new loans at a discount or hold them on their balance sheets in hope of eventually selling them into a stronger market next year, the result could be negative for fourth-quarter earnings, according to Charles Peabody, analyst at Portales Partners. Banks will be forced to record unrealized losses, or to sell and to realize losses, he said.
Peabody said the potential earnings impact is hard to quantify, though the weak credit market could potentially hit all the banks he covers, including Goldman Sachs Group Inc, (GS.N) Morgan Stanley, Bank of America, JPMorgan Chase & Co (JPM.N) and Citigroup (C.N).
Spokespeople for the banks declined comment.
Reporting by Dan Freed in New York. Editing by Dan Wilchins and David Gregorio