The collateral crunch has hit. Last Thursday, DealBreaker reported that several banks were re-evaluating how they looked at the collateral value of hedge fund credit portfolios. Now the Financial Times is reporting that many banks are refusing to lend against subprime credit portfolios at all.
“Hedge funds say several banks in recent days have cut off lending pipelines to funds that use credit portfolios, including mortgages, collateralised debt obligations and subprime securities, as collateral,” the FT reports. “The banks mentioned were Bank of America and Countrywide although there are believed to be others. Bank of America declined to comment. Countrywide did not return calls.”
Hedge fund managers nervous about the reliability of their lending sources were likely to attempt to reduce their level of borrowings further, said one hedge fund manager not directly affected by the banks’ actions.
Several hedge fund managers, who spoke to the Financial Times on condition of anonymity, said funds that were heavy investors in the credit markets and, therefore, often highly leveraged, were finding they were no longer able to use their portfolios as collateral to borrow.
One manager said: “My prime broker is my first source of borrowing but I used to get additional financing from other sources. I called my usual banks last week to ask for their terms and they told me there weren’t any terms because they weren’t lending against my credit portfolio any more. I’m not that happy. I need more than just one lender.”
The FT says that prime brokers have not yet zeroed out the collateral value of credit portfolios. Yet.
US banks refuse to accept subprime collateral [Financial Times]