September 9, 2007 11:59 pm

Banks pay extra $300m in interest charges

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The world’s leading banks are already paying out an extra $300m in interest rate charges as the credit squeeze takes its toll on the troubled financial sector.

Some $20bn in bank redemptions, which must be refinanced in new bonds or loans, is due this month, while about $100bn is due by the end of the year.

The extra cost to banks of borrowing in the debt markets will therefore mount into the billions of dollars unless the markets recover.

According to data from Dealogic, 25 banks are together paying out an estimated $300m extra in lending charges on $70bn worth of bonds issued since July, when the markets began to suffer serious bouts of volatility, compared with debt priced before the summer’s turbulence.

Willem Sels, head of credit strategy at Dresdner Kleinwort, said: “If you look at the banks, the premium or extra interest you have to pay to issue a bond is abnormally high as people, whether it is pension funds or asset managers, need that extra enticement to buy.

“The uncertainty, the volatility and the low risk appetite means banks have to pay more to get their bonds away.”

Dominic White, fund manager at Morley Fund Management, said: “It could get worse for the banks. We have quarterly bank results at the end of the month, and they could be bad, although even if they are, it would at least remove a lot of uncertainty.”

Guy Stear, credit strategist at Société Générale, said: “It is a difficult time for the financial sector, but it is simply a reflection of the changing credit conditions. We did have very good conditions before the summer. Money was very cheap and now those days appear to be over.”

On top of the increasing costs in the bond markets, the banks are having to pay millions in extra charges to borrow in the shorter-term money markets, where interbank rates have risen sharply since July.

Leveraged loans, stuck on bank balance sheets as buy-out deals have been delayed, are also eating into profits.

Five banks – Citigroup, Goldman Sachs, Lehman Brothers, Merrill Lynch and Morgan Stanley – are together paying out $65m extra in lending charges on $9bn worth of bonds issued since July.

These can be accurately compared with previous deals, because they have the same maturities and structures, priced before the summer.

However, this figure rises to $300m when the other 20 bank bonds are included.

This latter is an estimated figure as these 20 bonds do not have exact like-for-like comparisons issued before the summer.

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