Routine loan deal becomes a test as bank capital tightens

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(Bloomberg)—Equity Residential, one of the largest apartment owners in the United States, normally finds refinancing its bank loans easy. This year, the trip was longer.

For the company’s $2.5 billion emergency line of credit known as Revolver, lenders have always treated the process as a formality or administrative task, chief financial officer Robert Garechana said in an interview. This time there was a lot more talk, often focusing on what the merchant banks would get from the company in return, he said.

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

Lenders weren’t worried about Equity Residential’s overall financial health, Garechana said. S&P Global Ratings rates the company’s main unit at A-, solidly in the investment grade category. But revolvers tend to have low fees, so banks see them primarily as a way to win more profitable business like bond underwriting.

Many banks have been thinking this year about who they are extending these types of loans to as the Federal Reserve hikes rates and the threat of a recession looms. Demand for credit is still relatively high: US commercial banks have seen their outstanding loans increase by around 7% since March, according to Fed data.

Capital boost

But lenders also face more risk, and regulators have pressured them to carefully consider what their capital requirements will be going forward. The Fed gives annual stress tests to banks to see how companies will perform in times of economic and market difficulties. This year’s tests have resulted in unexpected increases in capital cushion requirements for banks, including JPMorgan Chase & Co. and Citigroup Inc.

Banks have also faced higher capital requirements due to a different kind of buffer related to their status as global systemically important banks, said Alison Williams, senior banking analyst at Bloomberg Intelligence.

“In a very short period of time they had to shore up their capital to exceed these new requirements, so they became more disciplined with their commercial lending terms to maintain their balance sheet prior to these increases,” Williams said.

Many banks have now met current requirements, so pressure on business lending may ease for the rest of the year, Williams said.

According to Garechana, it was clear to Equity Residential that banks are considering their broader capital needs and asking more questions before lending to businesses.

“If we have this level of conversations, it must be much more difficult for lower quality or lower quality companies,” Garechana added.

Representatives from Bank of America Corp., which served as administrative agent on the revolver, and JPMorgan and Wells Fargo & Co., which participated as joint bookrunners, declined to comment.

Three reasons

The banks cited three general reasons for their extra caution, Garechana said. The first was that a stricter regulatory environment has increased capital requirements.

The second reason is that banks have received more loan applications in recent months. Many companies that could not borrow at reasonable rates in the investment grade bond market or the junk bond market decided to obtain bank loans instead, which tied up the balance sheets of lenders. In addition, the market for packaging mortgages into bonds and selling them to outside investors has cooled, meaning that banks have had to hold more of these loans themselves.

And the third was that some foreign banks, especially those that don’t have local dollar deposits, find it harder to commit to lending to the United States because the greenback is so strong against their currency. national.

According to public documents, two international banks based in other countries dropped the gun during the refinancing process: the French bank BNP Paribas SA and the Japanese Sumitomo Mitsui Banking Corp., a unit of Sumitomo Mitsui Financial Group Inc. In addition from BNP and SMBC, US regional bank Fifth Third Bancorp also left the group. Garechana said the company still has a good relationship with the banks and there are “no burnt bridges”. In the end, 19 banks were on Equity Residential’s last revolver in October.

Representatives for BNP and Fifth Third declined to comment. A representative for SMBC did not respond to requests for comment.

hold money

Banks think about capital, but so do many business leaders. Real estate billionaire Sam Zell, founder and chairman of Equity Residential, said in an interview with CNBC on Thursday that he had more money and that a recession was likely. He also mentioned the challenge of refinancing the revolver.

One piece of evidence that banks weren’t worried about Equity Residential’s credit quality was the fees it pays on refinanced loans. The real estate investment trust pays 12.5 basis points a year just to have the gun, like before. For the money it draws on, it pays 72.5 basis points above the overnight secured funding rate. That compares with 77.5 basis points above the London interbank offered rate on its previous loan. The company also added a durability-related feature.

–With help from James Crombie and Patrick McHale.

© 2022 Bloomberg L.P.

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