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In today’s edition, we look at how banks are fighting to regain billions in fees lost to private len͏‌  ͏‌  ͏‌  ͏‌  ͏‌  ͏‌ 
 
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February 29, 2024
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Business

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Liz Hoffman
Liz Hoffman

Hi, and welcome back to Semafor Business.

A weird thing about modern finance is that a lot of what you might understandably think that banks do, they don’t really do, or don’t do much of anymore. The biggest mortgage lender in America isn’t a bank. Citadel, also not a bank, processes one in five stock trades in America. When Masayoshi Son, head of the world’s biggest venture capital fund, needed $4 billion, he didn’t call JPMorgan — he called Apollo.

Nowhere is that power shift starker than in the bread-and-butter business of corporate lending, where credit funds have taken market share away from banks. Today’s story digs into that dynamic, which is more symbiotic and less zero-sum than it looks.

Plus, crypto is booming, labor is winning, and Saudi Arabia’s sports spree continues.

Buy/Sell

➚ BUY: Labor. Bud Light maker AB InBev reached a five-year contract with workers to avoid a strike that would have started as soon as tomorrow at 12 U.S. breweries, and Starbucks eased off its hardline approach to its own union, announcing a “foundational framework” that would provide back pay and potentially resolve dueling lawsuits.

➘ SELL: Delivery. Shipping delays and security fears in the Gulf have kept oil prices higher and complicated things for fast-fashion companies. A fertilizer-laden British ship sinking in the Red Sea has sparked environmental concerns.

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The Tape

Snowflake melts Britain Inc. is on sale… FAA gives Boeing 90 days on MAX mess… China continues crackdown on high-speed trading… Webull lines up $7B IPO… SBF seeks shorter sentence… Wendy’s walks back surge pricing plan… Uber CEO gets $136M options payout…

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Liz Hoffman

Private-lending frenemies

THE NEWS

Wall Street banks have lost out on billions of dollars in fees to private lenders. A few have figured out how to get some of that money back.

As private lenders muscle in on banks’ bread-and-butter business of corporate lending, JPMorgan, Wells Fargo, Goldman Sachs, and others have built sizable businesses lending to these upstart competitors, which are eager to juice their own returns with that favorite of Wall Street tools: leverage.

This lending casts these two camps more as frenemies than existential rivals in a game that is “less zero-sum than it seems,” said Dee Dee Sklar, who ran this business at Wells Fargo until retiring in 2019.

Numbers are fuzzy, but industry participants estimate that banks have lent as much as $150 billion to private credit funds, backed by loans to companies that are mostly midsized and owned by private-equity shops.

The loans charge 3% or so above a baseline interest rate, which suggests the half-dozen banks that are active in this space are making $4 billion a year. That’s not enough to compensate for the business they’ve lost to nonbanks, but it’s significant revenue, and gets more favorable treatment by regulators because it’s seen as safer.

JPMorgan has about $30 billion of these loans outstanding and Goldman Sachs has about $10 billion, to credit funds run by Apollo, New Mountain, and Blue Owl, according to people familiar with the matter and corporate filings.

Banks’ lending business is “being hollowed out by private credit,” said Jim Fellows, president of First Eagle Alternative Credit. “So what do they do? They come back and lend against it. They’re always chasing that fee.”

Funds like First Eagle borrow against their loans for the same reason KKR borrows against its buyouts and homeowners borrow against their houses: It boosts profits.

LIZ’S VIEW

There are no new hammers on Wall Street, only new nails.

Investors borrow against stocks. People borrow against their houses. Private-equity firms borrow against the cash flows of the companies they own. The universe of asset classes — buckets of sufficiently valuable things that can be borrowed against, bet against, securitized, collateralized, indexed, and generally tinkered with for profit by enterprising minds — has expanded to include art collections, lottery winnings, and litigation awards.

Private credit is a logical addition to that list. From essentially a dead start before 2008, it has grown into a $1.6 trillion market, and BlackRock estimates it could more than double over the next five years. “That’s an entire asset class that has to be financed,” one banker told me last week.

Since 2008 it’s become hard for banks to lend to risky companies. But it’s easy for banks to lend to the credit funds that do lend to those companies. They’ve traded one client set that regulators don’t like for another set that, for the moment, regulators are fine with. In the Rube Goldberg machine that is financial regulation, it makes perfect sense.

The question is where the risk is hiding. So far, these loans look fairly safe. Banks lend 40 cents or so on the dollar, leaving ample room for things to go badly before they take losses. Loans are secured by dozens of individual borrowers, which should make it less risky.

But that’s what boosters of subprime mortgage bonds said in 2007. Housing prices wouldn’t fall everywhere at the same time, they argued, so a pool of mortgages from Phoenix and Orlando and Chicago was safer than any single loan. We know how that went.

The companies that private credit funds lend to are facing soaring borrowing costs, and more and more are having trouble paying. Most of them are smaller companies that are less able to weather downturns, and most of them make their money the same way, by selling software and services to corporate customers. The loans usually aren’t rated by firms like Moody’s, whose track record is far from flawless but which are at least a check on Wall Street’s worst instincts.

It’s not hard to see how assumptions about private credit could be faulty. “Correlations do sometimes go to one,” Fellows told me. Adding debt on top would only exacerbate a bust.

Read here for the view from the Bank of England. →

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Live Journalism

A world class line-up of global economic leaders has been announced for the 2024 World Economy Summit, taking place in Washington, D.C. on April 17-18. Speakers include Brian Moynihan, CEO, Bank of America; Henry M. Paulson, Jr., Former U.S. Secretary of the Treasury; Suzanne Clark, President & CEO; U.S. Chamber of Commerce; John Williams, President and Chief Executive Officer, Federal Reserve Bank of New York; José Muñoz, President & COO, Hyundai Motor Company; Jared Bernstein, Chair, White House Council of Economic Advisors; Richard Lesser, Global Chair, Boston Consulting Group; Sim Tshabalala, CEO, Standard Bank and Gretchen Watkins, President, Shell USA, Pat Gelsinger, CEO, Intel; Sen. Ron Wyden, (D) Oregon and more. Speakers, Sessions & Registration here.

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Evidence

Bitcoin is in sight of all-time highs, pushing past $60,000 for the first time since 2021, as investors pour money into new exchange-traded funds. This week, more than $1 billion went into the 10 funds that have opened for business since the Securities and Exchange Commission gave its grudging approval last month, with $520 million coming into a single fund, managed by BlackRock, on Wednesday alone.

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What We’re Tracking
Alex Wong/Getty Images

OpenerAI: Securities regulators subpoenaed executives and board members of OpenAI as part of an investigation into whether CEO Sam Altman misled investors, The Wall Street Journal reports. Any case would test how securities laws apply to firms like OpenAI, which is governed by a nonprofit and told its backers to consider their investments to be “in the spirit of a donation.”

Three months after a board coup briefly ousted Altman, OpenAI’s legal troubles are mounting: Federal prosecutors have opened a criminal investigation into the matter, and more news outlets have sued the company for copyright infringement. Newly installed board chair Bret Taylor told Semafor’s Reed Albergotti last week that “we’ll be super transparent” about the board’s probe into Altman’s firing.

Riyadh’s new racquet: Saudi Arabia bought the naming rights to men’s professional tennis’ rankings. The kingdom’s investment is its latest move into global sports, and comes while the Saudi-backed LIV golf league is negotiating with the PGA Tour over their still-unconsummated merger. Sports are a key pillar of Crown Prince Mohammed bin Salman’s plan to reshape Saudi Arabia’s economy away from oil; the country has spent heavily to recruit star soccer players and bring Formula One to the Gulf.

Turbulence ahead: Carlyle escalated a fight with insurers over 23 airplanes it owns that are trapped in Russia. In a letter this week to federal regulators, the investment firm said that AIG, Chubb and other firms that insured jets leased to Russian airlines, which are grounded and not being regularly maintained, have refused to pay hundreds of millions of dollars in claims.

Few aircraft insurers have disclosed their reserves for Russia-related claims, and Caryle raised the specter of widespread financial losses. “Every airline in the world should be concerned about what’s happening here,” Steve Marks, a lawyer at Podhurst Orseck who is representing Carlyle in an ongoing lawsuit against the insurance companies, told Semafor.

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