Business news - Earnings & Banking

Money markets fed staff seen downplaying reserve rate cut


´╗┐* N. Y. Fed blog raises issues from negative rates * Fed staff raises possible drawbacks on cutting IOER By Richard Leong NEW YORK, Aug 29 U.S. Federal Reserve researchers this week downplayed the chances that the central bank would reduce the interest it pays banks on their excess reserves in order to stimulate lending. Cutting the interest on excess reserves (IOER) that banks park at the Fed could knock short-term interest rates into negative territory, disrupting money markets and the bank systems, two senior New York Fed staffers argued in a blog on Wednesday. That came two days after a separate blog post from a pair of Fed economists arguing that cutting IOER would not alter lending habits and as such would do little to boost the economy. Analysts say the timing of the two blogs from Fed staffers was coincidental and had no connection with the current thinking of policymakers. A New York Fed spokeswoman declined to comment. Still the issues raised are in step with the concerns some Fed officials expressed at the central bank's last policy meeting, according to the July 31-Aug. 1 meeting minutes. If interest rates go negative as a result of the Fed cutting the IOER to zero, the possible reactions among consumers and banks could be "socially unproductive," New York Fed staffers Kenneth Garbade and Jamie McAndrews said in a blog published Wednesday on the New York Fed's website. Garbade is a senior vice president in the money and payments studies function at the New York Fed's research group and McAndrews a research director at the bank. They added that negative short-term rates might create "new risks that are not fully priced by market participants." Negative interest rates could further squeeze the $2.5 trillion U.S. money market fund industry which has already been struggling with near zero rates, analysts said. If the Fed were to cut IOER, driving money fund share prices below zero so they "break the buck," investors could rapidly withdraw money from these funds, causing market turmoil like that seen after the collapse of Lehman Brothers in September 2008. "These are clear trial balloons," said Howard Simons, a strategist at Bianco Research in Chicago. Cutting the IOER is "not really a good idea." Garbade and McAndrews' blog was the second in three days in which Fed staffers highlighted the drawbacks of cutting the IOER, a move some economists have said could spur lending. On Monday, Gaetano Antinolfi, a Fed senior economist, and Todd Keister of the New York Fed's research and statistics group, said reducing IOER would do little to change the amount of reserves banks leave with the central bank. "The quantity of balances banks hold on deposit at the Fed would be essentially unaffected by a change in the IOER rate," they wrote. Simply reducing what the Fed pays on excess reserves would not encourage all banks to lend businesses or consumers, leaving the overall amount of excess reserves little changed, they said. Jeremy Lawson, a senior economist at BNP Paribas, said the pair of Fed economists was "debunking the myth that IOER is hampering business lending." Traders have been speculating the Fed will embark on more policy stimulus at its Sept. 12-13 meeting with bets Fed Chairman Ben Bernanke would hint at further easing on Friday at a gathering of global central bankers in Jackson Hole, Wyoming. Most of the traders' focus has been on further quantitative easing (QE) in the form of large scale bond purchases. There has also been chatter the Fed might extend its commitment to keep short-term rates near zero. Markets consider cutting the IOER the least likely option for the Fed, although the idea of such a move was revived after the European Central Bank cut a similar rate to zero earlier this summer in a bid to help the region's economy. "I've never thought it is an effective tool like QE," BNP's Lawson said.

Rlpc european leveraged loan pricing tumbles


´╗┐Pricing has fallen across the board in Europe's leveraged loan market, eroded by a lack of supply and high demand, as well as competition from high-yield bonds and the US loan market. The slump in interest margins has occurred on new buyout deals such as French veterinary pharmaceutical firm Ceva Sante Animale and UK credit reference business Callcredit, and on existing credits that are now repricing, often mere months after last tapping the market."There is new pricing in Europe. There is not enough supply, which is setting a precedent for future deals," an investor said. Many European buyout loans were being offered at 450bp six months ago and last month pricing for new buyouts was reduced to 425bp for deals such as classified advertising business Scout24 and catering equipment firm Hofmann Menu. Since February pricing has fallen further, with Ceva Sante in the market with a dual-currency 668 million euro-equivalent ($930.36 million) Term Loan B that will pay 350bp on the euro portion and 325bp on the US dollar tranche. Both are offered with a 1 percent floor.

"Ceva's pricing is hard on the European market and it is structured like a US deal with no covenants. Many investors would prefer 425bp with no floor than 350bp with a floor," a leveraged finance banker said. Prices have also dropped on sterling deals. A 177.5 million pound ($296.01 million) Term Loan B backing Callcredit's buyout will pay 475bp, down from 500bp paid on Term Loan Bs backing the buyout of Burton's Biscuits in December and UK-headquartered packaging company Chesapeake in September. REPRICING RAGE

Interest margins on repricings are even more aggressive as investors succumb to harsh cuts rather than be taken out of a deal and repaid if they refuse the request. As a result, borrowers are making a rapid return to the market to lower interest margins, even if there has not been any great improvement in company performance.

French smartcard maker Oberthur Technologies allocated a 461 million euro-equivalent repricing this week, cutting pricing on a $280 million loan from 475bp to 350bp and on a 260 million euro loan to 375bp, down from 500bp on the previous deal. Both were offered with a 1 percent floor. Oberthur conducted a refinancing of its 2011 buyout loan in October on more favourable terms but decided to conduct another repricing after the market tightened further. French funeral firm OGF also launched a repricing of loans that backed its buyout by Pamplona Capital Management less than six months after they were put in place."OGF is less than six months old and it is repricing already, that is crazy. The company's performance has not changed and there has been no great improvement," a second leveraged finance banker said. "M&A hasn't come through so borrowers are thinking, why not reprice? Borrowers can get better terms as the market has tightened a lot since they did the deals."Goldman Sachs and JP Morgan are leading the repricing and are seeking to shave between 50bp and 75bp off a 575 million euro TLB to pay between 375bp-400bp from a current level of 450bp. They are also looking to remove a covenant. ($1 = 0.7180 Euros) ($1 = 0.5997 British Pounds)