BlackRock, Inc. BLK, one of the world's leading asset management firms, filed with the U.S. Securities and Exchange Commission (“SEC”) to obtain approval for establishing an internal lending platform. The program will enable the company’s in-need-for-cash mutual funds access to excess cash of other funds managed by the firm.
The application was submitted by BlackRock’s privately owned investment manager BlackRock Advisors, LLC as well as registered investment advisory firm BlackRock Fund Advisors.
How will This Help?
Due to elevated volatility in the U.S. bond funds, which is expected to continue in the upcoming quarters, the funds have been experiencing increased investors’ redemptions. The early redemptions lead to cash shortfalls and hamper the fund operations.
Along with cash drag maintained by the funds to meet sudden early withdrawals, the firms usually hold credit lines with banks to cover increased pull-outs by fundholders. However, cost of borrowing tends to be higher in case of bank loans and can be burdensome if the funds’ temporary cash needs are significant.
Therefore, BlackRock wants to set up an interfund lending program, which will facilitate borrowing and lending money for the funds at cash shortfall from sister funds holding free cash. This will reduce the costs involved in the process along with providing more flexibility as well as increased returns compared with money market instruments to the lending funds.
Implications
BlackRock will continue to borrow from existing bank credit lines after receiving approval for its internal plan. The firms’ credit facility has gone up tremendously from $500 million in 2013 to more than $2 billion. The current credit arrangement provided by a group of banks will end in Apr 2016.
However, rising uncertainty regarding the banks’ willingness to carry forward existing credit lines owing to changes in regulatory bank capital rules has compelled BlackRock to search for other alternatives.
Currently, BlackRock holds a Zacks Rank #4 (Sell). Some better-ranked investment management firms include Affiliated Managers Group Inc. AMG, AllianceBernstein Holding L.P. AB and Woori Bank Co., Ltd. WF. All these stocks carry a Zacks Rank #2 (Buy).
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