Key looks to offload risk in deal with Blackstone

Bloomberg

.The Cleveland-based regional bank KeyCorp has struck a loan partnership with the private equity giant Blackstone, marking the latest tie-up between banks and asset managers.

Under the deal, Blackstone will absorb risk associated with customers of Key's specialty finance lending group that fail to repay their loans, while providing a steady stream of funding for new lending.

The partnership is the latest example of nonbank lenders taking credit risk from regional banks, whose balance sheets have been somewhat constrained in the aftermath of last year's bank failures.

"The banks have the relationships, and the credit funds have the capacity," said Jeff Davis, managing director of Mercer Capital's financial institutions group. "So while the two are competitors … they can work together."

The deal, which was announced Monday, comes as federal regulators are poised to tighten capital rules for large and regional banks, potentially prompting more such activity.

The core rationale for the deal is "supporting our specialty finance lending business and its continued growth," Randy Paine, the head of Key's institutional bank, said in an interview. But the partnership also frees up a bit more balance sheet space as the stricter rules get finalized, he noted.

"It's the right thing for our clients so that we can support them," Paine said, adding that the deal also helps KeyCorp "achieve all of our objectives from a capital and liquidity standpoint."

Asset managers have been absorbing more of banks' credit risk — by directly buying bank loans, by taking chunks of them in the securitization market or through newer arrangements known as credit-linked notes.

But KeyCorp's deal with Blackstone is a more direct partnership where the two firms "can grow together," Paine said.

Banks that shed credit risk can hold less capital to absorb potential losses. The investors who take on that risk stand to earn a hefty income stream if the loans don't run into trouble.

Blackstone President Jon Gray said during a conference call last July that the company was partnering with banks and other originators that are dealing with more lending constraints but want to keep serving their customers.

And in April 2023, Gray told analysts: "As regional banks experience outflows of deposits, we are seeing real-time opportunities to partner with them at scale. …"

The terms of Key's deal with Blackstone were not disclosed.

Key's specialty finance lending group focuses on loans to firms that, in turn, do their own lending. Its clients include equipment finance companies, middle market lenders, business development companies and other business-focused private lenders.

Key and Blackstone said that the transaction involves a "seed portfolio of middle market fund finance facilities."

The $188 billion-asset bank will continue making the loans and working directly with clients, whose financing needs continue to grow, Paine said.

Key's specialty finance lending group has "deep relationships with originators," Rob Horn, Blackstone's global head of infrastructure and asset based credit, said in the announcement.

"We are pleased to have closed this initial transaction and look forward to growing the relationship," Horn said.

Blackstone recently announced a similar partnership with the U.S. credit card division of the British bank Barclays, along with a purchase of $1.1 billion of card loans. In September, Wells Fargo announced a loan partnership with the private equity firm Centerbridge. That deal focuses on direct lending to middle-market firms.

KeyCorp, the parent company of KeyBank, has struggled a bit more than most other regional banks over the past year. Its pandemic-era investments in low-yielding bonds have dragged down its profitability and weighed on its capital, though Key executives anticipate a turnaround this year since those investments are starting to mature.

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Key's focus on striking arrangements similar to the Blackstone deal precede its recent struggles.

In 2021, the bank and the real estate firm Welltower reached a similar deal on senior housing and skilled nursing facility loans. Paine noted that Key also has another loan partnership in place with another unnamed asset manager.

He indicated that more such partnerships could be in the cards. KeyCorp will look to "continue to build on our success at bringing in these kinds of partners," Paine said.

Key's new partnership with Blackstone lines up with the bank's long-standing goal of generally keeping about 20% of the risk associated with its commercial-focused loans on its balance sheet, Paine said.

That strategy has been in place since "well before the challenges that the banking industry" had last year, according to Paine.

Key views those partnerships as "very strategically important," Paine said, no matter the outcome of the pending capital requirements for large and regional banks.

In recent weeks, Fed Chairman Jerome Powell has said he's open to significant changes to regulators' proposals, which have come under fire from industry groups.

Kevin Wack contributed to this story.