A New Hundreds of Billions Dollar of Debt Coming Due

From WSJ:

U.S. and European banks, already burdened by losses and concerns about their financial health, face a new challenge: paying off hundreds of billions of dollars of debt coming due.

At issue are so-called floating-rate notes -- securities used heavily by banks in 2006 to borrow money. A big chunk of those notes, which typically mature in two years, will come due over the next year or so, at a time when banks are struggling to raise fresh funds. That's forcing banks to sell assets, compete heavily for deposits and issue expensive new debt.

Most of the floating-rate notes are denominated in dollars. But redemptions of notes denominated in euros also loom for European and U.S. banks. In the final four months of this year, some €15 billion to €20 billion will come due every month, says Mr. Stear, the Société Générale strategist. That compares with some €7 billion to €15 billion that came due every month in the first half of 2008.

The crunch will begin next month, when some $95 billion in floating-rate notes mature. J.P. Morgan Chase & Co. analyst Alex Roever estimates that financial institutions will have to pay off at least $787 billion in floating-rate notes and other medium-term obligations before the end of 2009. That's about 43% more than they had to redeem in the previous 16 months.

The problem highlights how the pain of the credit crunch, now entering its second year, won't end soon for banks or the broader economy. The Federal Deposit Insurance Corp. said on Tuesday that its list of "problem" banks at risk of failure had grown to 117 at the end of June, up from 90 at the end of March.

"It's going to be a bigger problem now than it was in the first half of this year, but it's going to continue on for probably at least a nine-month period," said Guy Stear, credit strategist at Société Générale SA in Paris.

By the end of this year, big banks and investment banks such as Goldman Sachs Group Inc. (GS), Merrill Lynch & Co (MER), Morgan Stanley (MS), Wachovia Corp. (WB), and U.K. lender HBOS PLC must each redeem more than $5 billion in floating-rate notes, according to a recent report from J.P. Morgan (JPM). Other big lenders such as General Electric Co. (GE), Wells Fargo & Co. (WFC) and Italy's UniCredit Group also face big bills in coming months, the report says.

From Bloomberg :

Banks sold $960.8 billion of so-called floaters between 2005 and 2007. About $260 billion, or about 30 percent, of the debt coming due in the remainder of this year is floating-rate notes. According to Alex Roever, a short-term debt analyst at JPMorgan in New York, Banks wanted to borrow the money at the cheapest levels possible and floating-rate notes helped them achieve that.

Banks are raising rates on certificate of deposits to attract cash from new customers. Banks may be able to raise at most $110 billion in floating- rate notes, less than half the amount coming due

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