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Alternative Market Briefing

Hedge funds step in to provide capital as banks become utilities

Wednesday, April 30, 2014

Bailey McCann, Opalesque New York:

Hedge funds may see new opportunities as capital providers and non-bank financiers as regulation turns traditional banks into a utility, according to panelists at the Milken Global Conference currently underway in Beverly Hills, California. Managers from EJF Capital, CQS, LWPartners and Pharos Capital Group all noted big changes ahead for the banking sector which will change how banks respond. Both big banks and community banks are now faced with Dodd-Frank and will have to increase capital on the books while likely ending whole lines of business because of balance sheet impact.

"One of the big themes we see are banks becoming utilities," said Emanuel Friedman CEO EJF Capital. "Financing companies like BDCs are stepping in to fill the gap now that banks aren't providing capital like they used to."

Under Dodd-Frank rules, banks will have to have 10-12% in tangible cash on hand, Friedman explains. He says this makes buying up CDOs and other loans like TRuPs are promising opportunities. EJF is one of the largest holders of both products in the US. They have also expanded this to a global opportunity by buying $3bn in European debt paper to date.

"Once you get the banks or the gorilla out of the room you need an operator who can securitize. From there you have options," Friedman says noting that he is looking at BDCs which are filling the capital gap along with monoline insurers as related opportunities.

Others on the pane......................

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