Regional banks want to slim down. Hedge funds smell a bargain.
Regional banks around the U.S. are striking complex and costly bargains with hedge funds, hoping to insulate themselves from a replay of the turmoil that followed Silicon Valley Bank’s failure last year. Wall Street smells a payday.
Ohio-based Huntington Bancshares recently entered into an arrangement to sell investors some of the risk that its borrowers won’t repay their loans. That helps the bank meet new proposed standards meant to make lenders look healthy to regulators. The deal is known on Wall Street as a synthetic risk transfer, and it offers cash-flush, private-debt fund managers—such as Ares Management and Blackstone—an attractive investment.
Bayview Asset Management, the fund involved in Huntington’s December deal, stands to make as much as 15% on the trade and a similar one done for SoFi Bank, people familiar with the matter said. Now others are doing the deals, too. Large regional lenders including Utah-based Ally Bank and North Carolina-based Truist Financial are working on their own transactions to sell the risk on billions of dollars of loans, according to the data provider Finsight and letters to the banks from the Federal Reserve.
Regulators are forcing the banks to meet stricter rules to protect themselves from crises of confidence, such as the ones that toppled SVB and recently shook New York Community Bank. Ultimately, risk transfers should help banks stabilize and start spending money again on such things as share buybacks and acquisitions, analysts said. “You could call it aggressive defense," said Ken Usdin, a banking analyst at Jefferies.
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