Bank of America is offloading some margin loans after losing $292 million on soured credit to the former chairman of Steinhoff International Holdings, according to people with knowledge of the matter.
The bank has reached out to rival lenders, looking to sell some riskier margin loans it provided to wealthy clients and other investors, said the people, who asked not to be identified discussing private talks. In recent weeks, senior staff at Bank of America have been combing through the firm's portfolio to identify debts for potential sale.
Bank of America suffered the largest loss on margin lending to the South African billionaire Christo Wiese, who had used his stake in Steinhoff as collateral to borrow about 1.25 billion euros ($1.53 billion) from at least eight global banks, according to a document that details the loan exposure. Shares of the retailer plunged in December after it disclosed accounting irregularities, leaving banks with little recourse besides seizing and liquidating the stock.
Within weeks, Bank of America hired an outside law firm to figure out what went wrong, subjecting its margin-lending operations to intense scrutiny. More recently, it has been looking to sell other margin loans discreetly to rival firms, the people said.
Jessica Oppenheim, a spokeswoman for the Charlotte, North Carolina-based bank, declined to comment.
The firm is focusing on selling what are known as non-recourse, single-stock margin loans, which allow borrowers to put up shares of one company as collateral rather than a mix of securities, the people said. That type of margin loan is considered to be among the riskiest.
Banks that accept those arrangements have little ability to go after any other asset a borrower might have, even if the value of the stock backing the loan collapses. Lenders can ask borrowers to put up more margin — cash, securities, other assets — to forestall the seizure of what's already been accepted as collateral. If the borrower can't or won't, the bank is stuck holding shares worth a fraction of their former value.
Large margin loans often are funded by a syndicate of banks, with each one putting up some of the financing. That means firms such as Bank of America typically have to accept the same terms as the rest of the group. After getting burned on Steinhoff, the firm set out to unload loans that no longer meet its risk appetite, ideally by selling them to another member of the same syndicate, the people said. That means the buyer would already have a relationship with the client.
Such a handoff is delicate, because many bankers use margin loans to deepen relationships with major clients with the goal of handling additional business for them or the companies they run. For equities-trading desks, margin loans can themselves be lucrative, as compensation for the risks they involve.
Banks that made loans to Wiese wrote off much of the debts in the final weeks of 2017. The shares have plunged more than 90 percent since Steinhoff said it found irregularities, and the accounting issues haven't yet been resolved.