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Moody's: shorter bank debt maturities raise refinancing risk

Global Credit Research - 09 Nov 2009

$7 trillion rated debt due by end of 2012

New York, November 09, 2009 -- The maturities of banks' publicly traded debt (wholesale debt) have shortened in recent years, according to a new report by Moody's Investors Service that looks at the trend in more than 25 banking systems. Those banks whose debt maturity profiles have shortened substantially will face relatively large refinancing needs in the coming years, exposing them to greater funding pressures and increased costs.

The average maturity of new debt issuances rated by Moody's has fallen in several banking systems over the past five years. Globally, average wholesale debt maturities issued by banks fell from 7.2 years to 4.7 years, which is the shortest average maturity for new debt in 30 years. Moody's estimates that rated banks will face maturing debt of about $10 trillion between now and the end of 2015 -- $7 trillion of which will come due by the end of 2012.

Having also examined individual banking systems, Moody's reports that this trend has been particularly pronounced in the United States and the United Kingdom. In the US, the average maturity of rated debt has fallen from 7.8 to 3.2 years over the last five years. In the UK, it has gone from 8.2 to 4.3 years. As a result, Moody's-rated banks in these two systems will be challenged by more than $2 trillion of maturing debt between now and the end of 2012.

"Throughout this crisis, the market has been focused on the asset side of the balance sheet. This analysis focuses on the liabilities," said Moody's Vice President Jean-Francois Tremblay. Moody's believes that banks whose debt maturity profiles is tilted towards the short end will be driven by risk management to replace maturing short-term debt with longer maturities.

"When a bank's debt profile becomes skewed towards short-term maturities, it becomes vulnerable to a sudden increase in interest rates and/or swings in investor confidence," he said. Similarly, when a bank heavily relies on debt instruments that feature periodic yield step-ups, call or put options, it also increases its exposure to a refinancing risk, the report mentions. "Such exposure may become increasingly apparent and important as we begin to see the withdrawal of various government support programs worldwide" Tremblay adds.

For example, a Baa-rated bank that issued short-term debt under a Aaa-rated government guarantee program has been paying a coupon of approximately 1.3%, whereas it would have to pay approximately 7.75% currently for issuing a 10-year bond on the basis of its own credit standing, a steep 645 basis point increase.

Still, investors should not automatically associate the shortening of a bank's debt maturity profile with credit quality concerns, the rating agency said, as the ultimate impact is largely determined by other factors. Moody's emphasizes that its ratings currently incorporate refinancing risk as part of its ongoing credit analysis. Banks' debt maturity profiles may become an important differentiating factor of competitiveness and credit quality.

"Banks will attempt to reduce the size of their wholesale refinancing needs by shrinking their balance sheet, increasing deposits base or a combination of both", Tremblay said. Despite these initiatives, Moody's expects that many banks will still be left with a sizeable amount of debt to raise from the market.

Banks that ultimately have to issue debt at a higher cost may attempt to pass on extra costs to customers. However, households and corporates are already financially stretched and this move might cause delinquencies to increase.

"Ultimately, we are focused on banks' ability to manage this potentially significant increase in costs while generating sustainable positive earnings," concludes Tremblay.

The report is titled "Banks' Wholesale Debt Maturity Profiles Shorten, Exposing Many Banks to Refinancing Risks"

* * *

NOTE TO JOURNALISTS ONLY: For more information please contact New York Press Information +1-212-553-0376; EMEA Press Information in London +44-20-7772-5456; Juan Pablo Soriano in Madrid +34-91-310-1454; Alex Cataldo in Milan +39-02-914-81-100; Eric de Bodard in Paris +33-1-5330-1020; Detlef Scholz in Frankfurt +49-69-707-30-700; Mardig Haladjian in Limassol +357-25-586-586; Alex Sazhin in Moscow +7-495-228-60-60; Petr Vins in Prague +4202 2422 2929; Tokyo Press Information +813-5408-4110; Hilary Parkes in Toronto +1-416-214-1635; Hong Kong Press Information +852-2916-1150; Hector Lim in Sydney +612 9270 8102; Luiz Tess in São Paulo +5511-3043-7300; Alberto Jones Tamayo in Mexico City +5255-1253-5700; Daniel Rúas in Buenos Aires +54 11-4816-2332 ext. 105; Leon Claassen in Johannesburg +27-11-217-5470; Jehad el-Nakla in Dubai +971 4 401 9536; or visit our web site at www.moodys.com

New York
Gregory W. Bauer
Managing Director
Financial Institutions Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Jean-Francois Tremblay
Vice President - Senior Analyst
Financial Institutions Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's: shorter bank debt maturities raise refinancing risk
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© 2013 Moody's Investors Service, Inc. and/or its licensors and affiliates (collectively, "MOODY'S"). All rights reserved.

 


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