Wall Street’s largest securities dealers eased credit terms during the second quarter for hedge funds and private-equity firms that borrow against securities and trade over-the-counter derivatives, according to the results of a Federal Reserve Board survey issued Tuesday.
Dealers — which include a mixture of banking and nonbanking firms — said they had granted hedge funds, private-equity firms, and other similar private pools of capital “somewhat more favorable terms” over the past three months. Among the reasons they cited were “more aggressive competition” as well as an improvement in the financial strength of counterparties.
Dealers indicated that there was an increased effort by counterparties over the latest three-month period to negotiate better terms. “Almost two-thirds of dealers indicated that the intensity of efforts by these counterparties to negotiate more-favorable price and nonprice terms had increased over the past three months,” the survey said.
However, the central bank said respondents found overall current credit terms for all counterparty and transaction types “uniformly more stringent” than before the onset of the financial crisis at the end of 2006. A majority of dealers surveyed said that credit terms at their own institutions were “somewhat tighter” for hedge funds, private-equity firms, insurance companies and nonfinancial corporations. Nearly a third said credit terms for some hedge funds and private-equity firms were “considerably tighter,” the survey said.
“Easing terms is not the same as easy terms,” said Jaret Seiberg, an analyst with Washington Research Group, a division of Concept Capital. “During the crisis, banks tightened considerably. So it is natural for banks to ease these standards as the market recovers.”
The first-time survey, known as the Senior Credit Officer Opinion Survey on Dealer Financing Terms, is part of a broad effort by the central bank to collect information on the amount of leverage outside of the banking system. By obtaining a qualitative picture four times a year of the terms of the availability and terms of credit in securities financing and OTC derivatives, the Fed says it will be in a better position in the event of another financial crisis.
The results seemed to be “encouragingly stable,” said David Stephens, chief financial officer for United Capital Markets. “What’s good for the hedge funds is good for the small- and middle-sized banks. To the extent that there is any easing of credit requirements, it will be to the benefit of the banks on the smaller end of the size scale.”
Securities dealers reported they “generally loosened credit terms offered to important groups of clients,” such as hedge funds, insurance companies and other institutional investors.
“Looking forward over the next three months, more than one-half of survey respondents expected price and nonprice terms to remain basically unchanged, with the remainder of dealers anticipating somewhat tighter terms, on net,” the survey said.
The central bank also reported demand increased over the past three months for funding for high-grade corporate bonds, equities, agency residential mortgage-backed securities and nonagency asset-backed securities demonstrating improvement in credit conditions. The Fed said that half of the dealers that lend against other ABS and one-third of the respondents that lend agency RMBS reported an increase in demand for funding.
The credit officer survey was conducted in late May and early June. It includes about 20 dealers but might be expanded.