Major banks, including JPMorgan and Deutsche Bank, face a manageable amount of MF Global exposure, say analysts, after the brokerage firm filed for bankruptcy on Monday due to its high level of sovereign debt holdings. “In light of the bankruptcy filing, we examined the potential exposure of the US big banks to MF Global,” says David Hendler, head of US financial services at independent credit research firm CreditSights. “Our take-away message is that we expect some big US banks to have manageable to not material exposures to MF Global, although at this time none of the big banks have disclosed their precise exposures.”
On Monday, MF Global Holdings and its finance unit MF Global Finance USA filed for Chapter 11 bankruptcy protection in the Federal Bankruptcy Court in Manhattan, marking a major milestone in the fallout from the sovereign debt crisis.
In the filing, MF Global listed JPMorgan as indenture trustee, with a claim of $1.2.billion as the trustee on behalf of bondholders, or “bond debt” as it was listed under “nature of the claim”, while Deutsche Bank came in second with four outstanding “bond debt” claims.
However, a source close to JPMorgan says: “The $1.2 billion bond exposure, as cited in that filing, is actually a syndicated loan, where JPMorgan was the arranger. As with every syndicated loan deal, there are numerous banks involved and the exposure will be less than $100 million.”
Meanwhile, CreditSights analysts say that when they spoke with investor relations at JPMorgan, “they told us that it has no material exposure to MF Global and affiliates, noting to us that it had ‘aggressively risk managed it down’ for some time”.
CreditSights adds that MF Global also has a $300 million secured credit facility and “because that facility was secured, we believe that bank-loss exposures are likely [to be] minimal”.
Indeed, analysts at other independent institutions have remarked how, despite impending exposure due to the demise of MF Global, the exposure will be manageable.
“I can't speak of [JPMorgan’s] exact exposure over a period of time but according to various media accounts, [its] exposure to MF Global is less than $100 million,” says Otis Casey, director of credit research at Markit. “The loan is syndicated, meaning that it is held by other banks and investors, thus spreading out the exposure. The bank also likely used other risk management techniques. If the maximum exposure is limited to $100 million – and more likely a fraction of that unless MF Global's assets have no recovery value – that is not a threat to an institution that is as well capitalized as JPMorgan.”
While the banks have not officially confirmed their exposure to MF Global, CreditSights says in a research note that, in the past, JPMorgan has said it initially may hold as much as 7% to 10% of a syndicated credit facility, then sells down that amount over time.
Meanwhile, at the time of writing, JPMorgan and Deutsche Bank credit default swap (CDS) five-year spread levels widened, according to Markit data.
CDS transactions are not only essentially insurance policies for the buyer in the event of a loan default but are widely used to gauge the credit worthiness and associated probability of default of an entity.
Since yesterday, JPMorgan Chase & Co composite spread (five-year) reached 153bp, from 137bp on Monday, while Deutsche Bank reached 202bp as of Tuesday, from 170bp on Monday.
However, analysts say they are not certain that widening levels are attributable to the collapse of MF Global or eurozone sovereign debt issues.