Certain asset managers may be poised to benefit from European bank deleveraging, although there are a number of obstacles to them seizing this opportunity, says Moody’s Investors Service.
In a new special report, the rating agency indicates that credit-oriented investment managers are expanding their assets under management (AUM) by acquiring bank-loan portfolios for their clients, and by lending third-party funds to corporates and other enterprises that have traditionally been served by European banks.
This growth opportunity for asset managers has emerged as European banks seek to reduce assets, driven by both market and regulatory pressures, it says, noting that the IMF estimates that banks are to reduce assets by nearly €2 trillion.
“Managers that have the knowledge and ability to evaluate and price credit risk across a variety of European domiciles and sectors will have a unique opportunity to compete for the acquisition of these portfolios. For managers with this niche credit-investment expertise, this opportunity is credit positive, as the expansion of their third-party AUM will generate a longer-term, stable stream of investment management fee income,” explains Michael Eberhardt, a Moody’s vice president and senior analyst.
Moody’s suggests that the credit-positive effects of exploiting this opportunity will offer a medium- to long-term benefit to asset managers. And, long-term investors could benefit from the credit-investment vehicles they develop, which may satisfy the need for yield and assets that generate stable performance in a challenging economic environment.
The report says that asset managers with the necessary credit-analysis experience are best placed to take advantage of this opportunity to acquire bank loan portfolios and engage in direct lending, but that the opportunity faces challenges too.
For one, it says banks may face hurdles in selling these portfolios due to the challenge of agreeing on valuation. It says that banks will find it difficult to sell assets at a time when asset prices are subject to negative pressures due to the macroeconomic backdrop.
Several regulatory challenges will have to be overcome too, it says, including concerns about the systemic risks posed by this disintermediation of traditional banking. Moreover, the large number of jurisdictions and legal regimes in Europe requires a unique expertise, and managers without this expertise run an increased risk of future losses, it says.
“Despite the advantages for credit-oriented managers, the longer-term nature of the investment holding period required by both investment opportunities implies that managers who lack the necessary credit expertise and staff resources will find it difficult to raise third-party funds in order to take advantage of these opportunities,” adds Eberhardt.
“In addition, the extension of credit by asset managers without the requisite expertise to understand and price these assets, or originate new lending to sectors in which they have no expertise, will potentially experience losses and generate unfavourable returns for their third-party investors,” he warns.