The Bankwatch

Tracking the consumer evolution of financial services

A Banking crisis product behind the financing of the US Healthcare system

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During the 2008 Banking crisis, one created by investment bankers loomed large – Collateralised Debt Obligations (CDO).

They inner workings of these products created by spreadsheet junkies (not real bankers imho) was to create a debt product for sale that comprised a mix of A, B, n and junk mortgages. The key was the junk component made up of mortgages issued by likes of Wells Fargo with little or no diligence and which had little or no chance of being repaid on a normal regular payment schedule.

Fast forward to recent events (before covid-19) and similar tools have been used by likes of KKR to fund purchase of US Health Care companies. The same bundling approach of debt tranches from top tier to junk is used and the resultant product gets a top tier rating and interest rate despite containing junk bonds.

This is where the perfect storm comes in. In one exam KKR funded Envision, a $10 bn purchase with CLO. Envision is a health care provider.

Patients are resisting visiting hospitals due to fear of contracting covid-19. The business result is reduced revenue.
To manage this financial crisis, Envison is cutting back hours, bonuses and staff to meet the terms of the management contracts within the CLO. To state the obvious these are the very hospitals required to managed covid-19 and offer any non covid-19 media service.

This series of events has gone largely un-noticed while the massive Quantitative Easing (QE) by the US Fed is deployed. But we know one way this can end – think Sept 2008 and Lehman Brothers.

Due to their “expertise” in the space, the likes of KKR sell the product (the CLO) and earn fees as CLO managers.

Norinchukin Bank, Japan’s largest agricultural lender

There is another twist to this story. During the lead up to the 2008 banking crisis a trigger point was a failed loan payment between US and France.

On August 7, 2007 the French bank BNP Paribas halted withdrawals from its three investment funds and suspended calculation of their net asset values

KKR received much of their financing from Norinchukin Bank, and agricultural bank in Japan that is punching way above its weight. Its primmer customers are small local farmers who rely on the bank for deposit and loan services.

Could Norinchukin Bank be the next trigger point.

Written by Colin Henderson

May 13, 2020 at 07:41

Posted in Uncategorized

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