Energy Finance

Merrill Lynch & Co.,  Wachovia Corp., Lehman Brothers Holdings Inc. and other lenders are about to find out how expensive credit has become.

Banks, securities firms and lenders have a record $871 billion of bonds maturing through 2009, according to JPMorgan Chase & Co., at a time when yields are at their most punitive when compared with treasury notes. Increased yields could cost lenders as much as $23 billion more in annual interest versus a year ago, according to Merrill Lynch data.

High refinancing costs will reduce banks’ borrowing flexibillity in the capital markets, which could further reduce both commerical and consumer credit availability, curbing what is already the slowest growing economy since 2001.

As of June 30, Standard & Poor’s has given a negative outlook to almost 50% of the 50 highest-rated financial institutions in the U.S., the biggest slice in 15 years.

Investors are demanding bank-bond yields of 4.14 percentage points more than treasury yields, up from last year’s 0.76 percentage point in January, according to Merrill Lynch data. Spreads on investment-grade rated bonds are averaging about 3.14 percentage points.

Also, bank-to-bank interest-rate derivatives show that banks are becoming hesitant to lend to each other amid the flood of maturing debt.  Banks are charging a premium of 78 basis points more than that predicted by traders for the Fed’s daily effective federal funds rate average during the next three months, up from 24 basis points in January. Some forecasts predict a widening to 85 basis points, or 0.85 percentage point, by mid-December, thus approaching record levels.

Financial firms, which have incurred $504 billion of writedowns and credit losses since the start of 2007, are selling mortgage securities and collateralized debt obligations (CDOs) at fire-sale prices to pay down looming maturities.

For example, last month Merrill Lynch agreed to sell $30.6 billion of CDOs at 20% of face value. Lehman is said to be exploring the sale of all or part of its asset-management business, Neuberger Berman LLC.

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