Feb 26, 2013, 03.52 PM | Source: Reuters
Wells Fargo's role in a blockbuster investment banking deal is raising concerns at a major ratings agency.
Wells' agreement to provide financing for HJ Heinz Co's
Moody's stopped short of saying it might cut Wells Fargo's ratings, or change the outlook for its ratings, but did note that the bank appears to be dialing up risk. Wells Fargo's low exposure to the capital markets business allowed it to avoid a wave of downgrades that hit many of the biggest banks globally last year.
In a statement, Wells Fargo said it disagreed with Moody's assertion that "participation in capital markets activities necessarily leads to a higher risk profile." The bank has strong risk management and underwriting practices and followed them in the deal, the statement added.
Wells served as a financial adviser to Heinz and has joined JPMorgan Chase & Co
While JPMorgan has long been entrenched in the capital markets business, Wells Fargo has largely focused on providing traditional banking services like loans to large corporations, the report said. Wells, however, gained more capital markets capabilities when it bought Wachovia Corp in 2008.
Wells Fargo's "primary capital market capabilities... are lucrative but can lead to riskier activities," Tischler wrote.
When a bank serves as an adviser to a company on a deal, the client often expects it to provide financing, Tischler wrote. This can be a problem if a bank offers more financing than it should just to win lucrative investment banking fees. The Heinz deal could also encourage Wells to expand its capacity to trade debt and loans, Tischler wrote.
Wells Fargo has a longstanding relationship with one of the key players in the Heinz deal: Berkshire Hathaway's Warren Buffett. Berkshire is Wells Fargo's largest shareholder.