HSBC Holdings Plc, Royal Bank of Scotland Group Plc and the biggest UK banks face the most debt coming due in at least 10 years as the credit market seizure raises borrowing costs to the highest on record.
The six largest British banks have £54 billion ($95 billion) of debt to refinance by April, triple the amount of the year-ago period, according to data compiled by Bloomberg. HSBC, the UK’s biggest bank, and RBS each have about £11.5 billion of debt due, while Barclays Plc has £15.9 billion maturing, the data show.
Financing costs are soaring as banks hoard cash after the credit crunch triggered by the US sub-prime mortgage crisis a year ago. The three-month London interbank offered rate in dollars rose to 4.52 per cent from 2.64 per cent in March, while the equivalent rate for euros increased to a record 5.39 per cent, from 4.74 per cent six months ago.
“The banks have no idea how they are going to manage rolling over their debt,” said Kornelius Purps, a Munich-based bond strategist at UniCredit SpA. “The central banks will have to intervene.”
Rates rose this month even as the UK announced a cash injection to prevent a collapse of the banking system, Europe’s policy makers provided emergency funding and US President George W Bush approved a $700 billion rescue plan.
Government Rescue: Prime Minister Gordon Brown’s government will invest about £50 billion in the UK’s banks, the Treasury said in a statement today. The government will buy preference shares and the Bank of England will make at least £200 billion available for banks to borrow under the so-called special liquidity plan. The government will also provide a guarantee of about £250 billion to help refinance debt, the statement said.
HSBC and Standard Chartered Plc said they have no current plans to take government capital to bolster their reserves. RBS and Barclays will be taking up aspects of the plan, they said in statements.
Lloyds TSB Group Plc, which has about £512 million of bonds to refinance by the end of March, said it will make a futher announcement about the plan “in due course.”
Great Depression: Banks need more capital after the worst US housing slump since the Great Depression and $593 billion in worldwide losses and writedowns caused their stocks to tumble, forced Lehman Brothers Holdings Inc into bankruptcy and pushed the UK government to nationalize Bradford & Bingley Plc.
The UK bank debt includes bonds, commercial paper and equity-linked notes and compares with £18 billion repaid in the year-earlier period.
Investors are demanding an average 4.02 percentage points more in yield to buy bank bonds rather than government securities, up from 0.95 percentage point last year, according to indexes compiled by Merrill Lynch & Co. The so-called spread on investment-grade corporate bonds overall averages about 3.35 percentage points.
Rising yields may cost the banks as much as $5.6 billion more in annual interest compared with a year earlier should they refinance all of the debt in the bond market, Merrill data show.
“Bond investors are the guys that will decide the future of these banks and at the moment they’re not prepared to roll over their financing,” said Simon Maughan, a London-based bank analyst at MF Global Securities Ltd. “If you can’t roll over you’re in an awful lot of trouble.”
‘Normal Business’: Lloyds agreed to buy HBOS Plc in a stock swap on September 18. HBOS, based in Edinburgh, has £11.9 billion of debt due in the next six months.
Lloyds spokesman Emile Abu-Shakra in London declined to comment, as did a spokesman for HBOS. Lloyds TSB will pay about £10.2 billion in a stock swap for HBOS, based on yesterday’s closing share prices.
Standard Chartered, the London-based bank that earns most of its money in Asia, needs to repay about £2.4 billion of debt.
“The outstanding £2.4 billion in the context of a £400-billion balance sheet is not material,” spokesman Arijit De said. “Standard Chartered is not dependent on wholesale funding markets.”
Barclays has no debt that counts as regulatory capital maturing before the end of March, according to Simon Eaton, a London-based spokesman. “Any other financing represents our normal course of business,” he said.
‘Strong Deposit Growth’: HSBC’s maturities aren’t a reflection of funding requirements, London-based spokesman Patrick McGuinness said. “In parts of our business we are managing down the balance sheet, and in others we are seeing strong deposit growth.”
HSBC is one of the only European banks that takes in more in customer deposits than it loans out and has one of the highest capital ratios in Europe, Bloomberg data show.
RBS spokeswoman Carolyn McAdam declined to comment.
HBOS is the riskiest of the six banks and HSBC is the safest, according to traders of credit-default swaps.
Contracts on HBOS dropped to 213 basis points, meaning investors pay ¤213,000 ($290,000) a year to protect ¤10 million of debt from default for five years. Contracts on RBS are 206 basis points, Standard Chartered default swaps are at 137 and Barclays is at 131 basis points, CMA Datavision prices show. Lloyds is at 115 and HSBC is 79, according to CMA.
Credit Quality: Credit-default swaps are financial instruments based on bonds and loans that are used to speculate on a company’s ability to repay debt. Contracts for each of the six banks fell today, signalling an improvement in perception of credit quality.
The UK central bank will cut its benchmark interest rate a quarter-percentage point to 4.75 per cent tomorrow, according to the median estimate of 61 economists surveyed by Bloomberg News.
Federal Reserve Chairman Ben S Bernanke yesterday signalled a cut in US interest rates to shore up the economy and reduce funding pressure on banks. The European Central Bank said this month it will allow more banks to participate in its unscheduled cash auctions.
“If confidence returns there is less of a liquidity issue and the debt can be rolled over,” said Neil Smith, an analyst at WestLB AG in Dusseldorf. “Three months should be enough.”
