Credit Suisse and Nomura have warned of large losses after a fire sale of about $20bn of Chinese and US stocks, as their client Archegos Capital Management was forced into a massive unwinding of assets.
Nomura could face a total wipeout of its profits for the second half of the financial year, while Credit Suisse has warned the sell-off could have a “highly significant and material” impact on its first quarter results.
Shares in Japan’s largest investment bank fell by as much as 16 per cent on Monday morning in Tokyo, erasing more than $3.2bn from its market capitalisation, as Nomura warned of recent transactions with an unnamed client and the risk of a “significant loss” at its US subsidiary.
The Japanese and Swiss banks provided prime brokerage services to Archegos, which was founded by former hedge manager Bill Hwang, according to several people close to the matter. Prime brokers loan cash and securities to hedge funds and process their trades.
Credit Suisse said in a statement on Monday: “A significant US-based hedge fund defaulted on margin calls made last week by Credit Suisse and certain other banks. Following the failure of the fund to meet these margin commitments, Credit Suisse and a number of other banks are in the process of exiting these positions.”
“While at this time it is premature to quantify the exact size of the loss resulting from this exit, it could be highly significant and material to our first quarter results.”
Nomura said in a statement it was evaluating the extent of the potential losses, noting that its estimated claim against the client was about $2bn. The company said that figure was based on market prices at the close of the US trading on March 26 and could rise should asset prices continue to fall.
A private investment firm, Archegos was behind billions of dollars worth of share sales that captivated Wall Street on Friday. The fund, which had large exposures to ViacomCBS and several Chinese technology stocks, was hit hard after shares of the US media group began to tumble on Tuesday and Wednesday. The declines prompted a margin call from one of Archegos’ prime brokers, triggering similar demands for cash from other banks.
Hedge funds in Hong Kong and Tokyo said on Monday that traders worldwide were braced for further block sell-offs in stocks associated with Archegos and other funds that may also be forced to unwind heavily leveraged positions, such as Teng Yue Partners, when trading opens in the US on Monday. Teng Yue was not immediately available for comment.
Hideyasu Ban, an analyst at Jefferies, said that a $2bn loss estimate logged in the quarter ending on March 31 would wipe out most of Nomura’s pre-tax profits for the second half of the financial year ending this week.
Other prime brokers that had provided leverage to Archegos said the problems at Nomura and Credit Suisse related to being slower in offloading share blocks into the market compared with their peers, notably Goldman Sachs and Morgan Stanley.
An executive at a Wall Street bank in Hong Kong said: “It is unclear why Nomura sat on their hands and racked up these large losses.”
Another banker based in Tokyo said the extremely high level of leverage that Nomura appeared to have extended to Archegos was “baffling”.
Archegos is a family office that manages the wealth of Bill Hwang, a ‘Tiger cub’ alumnus of Julian Robertson’s legendary Tiger Management hedge fund. It had about $10bn of assets last week, according to prime brokers. New York-based Hwang previously ran the Tiger Asia hedge fund but he returned cash to investors in 2012 when he admitted to wire fraud relating to Chinese bank stocks.
An executive at a global hedge fund in Hong Kong said: “It is surprising that a China-oriented fund was using Nomura and being granted so much leverage by a Japanese bank. It looks to have been at least four times what a long/short equity fund would normally get.”
Teng Yue Partners, run by fellow Tiger club Tao Li, has also been linked to the sell-off that hit shares in US media groups and Chinese technology business GSX Techedu last week, according to prime brokers and traders in Hong Kong.
Bankers in Tokyo familiar with the circumstances surrounding the heavy sell-off of Archegos assets described the event as a possible “Lehman moment” that would force multiple lenders to recognise that leverage extended to the fund had created excessive risk.
Nomura and Credit Suisse are among at least five banks that provided prime brokerage services to Archegos, alongside Goldman Sachs, Morgan Stanley and UBS, according to people close to the matter.
Some banks banned all trading globally with Hwang after he settled with US regulators over illegal trading charges in 2012 and was banned from trading in Hong Kong in 2014.
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March 29, 2021 at 12:21PM
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Credit Suisse and Nomura warn of losses after $20bn stock fire sale - Financial Times
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