With nearly all of the top investment banks in a precarious financial position as a result of horrific investments in bad debt, banks have no shortage of things to worry about.
But the Financial Times reports that "battered US financial groups will have to refinance billions of dollars in maturing debt over the coming months, a move likely to push banks’ funding costs higher and curb their profitability."
The terrible results the banks have posted of late combined with continued weakness in the credit markets is likely to drive up the interest rates they’ll have to pay, increasing their interest expense and hitting the bottom line very quickly. Adding to that is the fact that hundreds of billions in writeoffs have instilled a new found fiscal conservatism on Wall Street, and the rates they’ll earn on their own investments will likely be lower than they were in the heady days of the subprime free-for-all: combine a higher cost of capital with a lower return on investment and you get some pretty bad reports.
According to Dealogic, Citigroup (C) has more than $5 billion in bonds maturing in August, with $12.8 billion more in December. Bank of America (BAC) has $7 billion in August and $9 billion in December.
The refinancing situation is unlikely to land with a bang, as the banks will likely be able to get the cash they need — they’ll pay whatever they have to. But the effect on long-term shareholder value could make the turnaround possibilities even more difficult, now that the subprime mess has made the banks themselves subprime.
Zac Bissonnette
Contact [email protected] for any questions or corrections.
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