When the private equity firm Blackstone gobbled up a German clothing retailer named Jack Wolfskin — known for its paw-print logo — the financier took out about $720 million in loans that its banks expected to slice up and sell to a variety of European banks and insurance companies.
But there were few takers. European banks were nervous about risk and scrambling to meet requirements for capital reserves. The original lenders — including Bank of America Merrill Lynch, Morgan Stanley and two big European banks — found themselves stuck with the big loans.
That was over the summer. Since then, European banks have retreated even further as they seek to bolster their capital reserves, Germany pushes for tougher rules on government deficits and the outlook for Europe’s economy dims.
The ripples have spread all the way to the United States.
“You’re seeing banks walking away from real estate commitments here,” said a senior U.S. investment banker for real estate who asked for anonymity to protect his business relationships. “It’s like a weight loss program. Only the Germans want you to go on a fasting program right now.”
Standard & Poor’s says it assigned ratings to two U.S. power plant developments that were delayed by several months because the developers were worried about lining up financing given the “choppy” European markets. A U.S. private equity firm says it pulled back from a major U.S. investment at the last moment because the company sells goods to Europe and economic conditions there are so uncertain.
“It was too much exposure to Europe,” a person familiar with the deal said on the condition of anonymity to protect business relationships.
In Europe, certain types of lending have ground to a near-halt, especially those on the riskier end of the spectrum. The amount of high-yield bonds sold in Europe averaged $4.5 billion a month until November, when such sales plunged to $1.1 billion, including just three offerings — a Swedish cable company, a German cementmaker, and a French auto parts company, according to statistics provided by S&P’s Leveraged Commentary and Data unit.
Loans to companies in Europe with less-than-stellar credit ratings tumbled, too, from nearly $6.7 billion a month to $1.6 billion in November.
“As long as people don’t have confidence, we’re not going to see high-yield markets come back,” said Sucheet C. Gupte, director of Leveraged Commentary and Data.
In many cases, U.S. banks and investment funds are stepping into the breach. A finance unit of General Electric in October acquired a $1 billion pool of energy project loans from the Bank of Ireland, which was selling non-core loans as part of its deleveraging plan.
Several U.S. private equity funds are also looking to buy up packages of loans or entire lines of business as European banks shrink. Recently, a U.S. private equity firm acquired a European company for a fire-sale price that it estimates effectively amounted to a 30 percent discount, said a person at the firm.
“We’re seeing a level of disengagement,” said Paul Coughlin, S&P’s head of corporate and government ratings. “European banks are putting their books on the market in Asia, in part to institutional investors or to banks that are quite well cashed up.”
European banks are not “cashed up.” On Thursday, the European Banking Authority in London said European Union banks need to raise $153 billion in fresh capital, providing buffers against potential losses or panics.
German banks need to raise an additional $17.5 billion, Italian banks $20.6 billion and Spanish lenders $35 billion in core Tier 1, the most secure type of capital, the authority said. The banks deepest in the hole, the authority said, include Spain’s Banco Santander, which must raise $20.5 billion, and Italy’s UniCredit, which must raise $10.7 billion.
Much of the gap is the result of marking down the value of sovereign bonds to depressed market levels. European leaders are demanding the region’s banks bolster capital.
That could mean months of slow lending that resembles the dearth of financing that contributed to the recession that hit in the United States in 2008. An economic slowdown in Europe could be grave. Banco Santander reported its first-ever quarterly loss for operations in Portugal, for example, and expects to shrink lending in Spain. A Citigroup report pointed to “a contraction in loans and margins” in the Iberian peninsula.
Banks in countries shaken by the sovereign debt crisis are struggling more than those in countries such as Germany, which are seen as more secure. Many depositors have moved funds out of banks, further depleting already-shaky institutions.
“The debt crisis will take a long time until it is solved,” said the German industrial giant Siemens. “It is important now that we see the crisis to be under control by the European Governments.”