A multibillion dollar business that banks’ equity derivatives and financing desks developed to help firms manage their decades-old stakes in Visa has started to wind down, leaving those teams to find alternative sources of revenue to offset the decline in activity.
Visa completed an exchange offer in May that allowed some of its biggest shareholders to offload up to half their stakes in public markets for the first time since its 2008 IPO. That partially released a prolonged lockup designed to keep Visa's original US member firms – mostly banks – on the hook for antitrust litigation brought by US retailers against the payments giant.
Helping monetise these Visa shareholdings became big business for investment banks' equity derivatives and financing desks over the years as Visa's member firms entered large and complex financial arrangements to sell their holdings. The Visa trades generated well above US$5bn in revenue over the past five years for investment banks facilitating these sales, according to data provider Vali Analytics.
Vali estimates US corporate equity derivatives revenues, which cover a range of activities where banks help clients manage strategic equity stakes, will decline by 10% in 2025 to 2026 as a result of firms selling their Visa shares following the exchange offer and unwinding the accompanying financial arrangements.
“There was a special situation in the US on Visa trades," said a senior US equity derivatives banker. “There's been a corporate action and the notional of those trades has halved this year. And so that creates kind of a loss year on year in [banks'] corporate derivatives desks because we’re making less revenue [from these trades].”
The little-known market for Visa B shares traces its origins to the company’s blockbuster IPO in 2008. Visa created a convoluted structure for its US$20bn listing, with a special share class for US member firms that issued its cards, such as Bank of America, Citigroup, JP Morgan and Wells Fargo as well as a host of regional banks. These B shares couldn’t be sold in the wider market until litigation was resolved against the payments firm from companies including Walmart and Home Depot.
That process has dragged on for years, leaving firms with a huge overhang of Visa stock that couldn’t easily be shifted. Only a select group could buy the B shares, mainly original member firms or companies that acquired them, severely limiting the market for these securities. Banks also had to set aside large amounts of capital against their Visa holdings, acting as a catalyst for many to shed their positions – as well as a deterrent for would-be buyers.
Historic opportunity
These challenges presented a historic revenue-making opportunity for structured equity bankers who developed complicated schemes to help member firms sell their B shares. The details of the trades varied depending on what firms were looking to achieve, but there were some common themes.
The trades were often enormous, because of the sheer size of the Visa holdings on sale. Depending on how the transactions were designed, they could also be extremely lucrative for the counterparties facilitating the sales, who tended to be compensated with a chunky stream of revenues as long as the derivative component lasted.
“People charged very fat spreads to do these trades and the trades were very big – literally in the billions,” said a second senior US equity derivatives banker. “Some banks, regional banks in particular, just said: 'give me whatever price, I’m going to sell it to you'.”
BofA and Goldman Sachs have been some of the most prominent firms in these markets in recent years, according to sources familiar with the matter. BofA made more than US$350m in revenues in 2023 on the Visa trades, sources said, while Goldman made over US$200m. Spokespeople for both banks declined to comment.
Citi has also been heavily involved in Visa trades over the years. The bank recorded a US$400m gain in its second-quarter earnings related to the Visa B share exchange, a "significant portion" of which was booked in its equities trading division. Those revenues were linked to client activity around the Visa trades and are not outside the normal course of business for its markets division, sources said. A Citi spokesperson declined to comment.
Private markets
The Visa trades were agreed in private, but typically, a member firm would sell their Visa B shares to a counterparty at a discounted price to incorporate some form of upfront fee and reflecting the difference in value between the B shares and Visa’s regular A shares at that time.
They would also enter an open-ended agreement – often in the form of a derivative contract or indemnity – that kept the member firm on the hook for any additional widening in the price between the two share classes arising from the Visa antitrust litigation. The counterparty would usually charge an annual spread for providing this arrangement, in part because of the large amount of regulatory capital banks have to put aside against the B shares. The perpetual nature of the agreement, meanwhile, helped insulate the counterparty from the high degree of uncertainty as to when the antitrust litigation against Visa would end – and how much it would cost.
"Nobody controls the date on which Visa settles the litigation – it's not clear. And therefore it's a hard position to manage if you don't have protection against changes in the exchange rate [at which the B shares are converted] and protection against durational longevity as well," said a third senior US equity derivatives banker. "It just raises a bunch of non-hedgeable risks that are hard to get your arms around."
Wells Fargo provides one example of a US Visa member that entered one of these arrangements. The San Francisco-based bank recorded a US$126m gain in the first six months of the year that it said was partly driven by derivative instruments related to previous sales of Visa B shares. Wells said in 2015 it had sold its 20.7m B shares in a series of transactions over several years.
Opening up
Visa's exchange offer, in which firms could tender half their B shares and eventually sell them on the open market, has shed more light on how member firms managed their positions in the company. Visa’s stock price has surged from US$44 at its IPO to US$256 today, meaning banks that retained some B shares have enjoyed a significant windfall even after litigation costs were subtracted.
JP Morgan, Visa’s largest member bank with a 23% stake at the time of the IPO, reported a roughly US$8bn gain after tendering its 37.2m Visa shares in the exchange offer. The US bank previously said it raised US$1.3bn in 2013 and US$914m in 2022 from selling B shares.
PNC Financial Services recorded a US$754m gain from the exchange offer, while also registering a US$116m loss on derivative hedges for its remaining Visa B shares, "primarily related to the extension of anticipated litigation resolution timing". Barclays reported a £125m gain on B shares.
The exchange offer means demand for the Visa trades has mechanically declined, although many banks anticipate activity will continue around the remaining B shares as the antitrust litigation rumbles on. Visa estimated in September that the remaining 10% of legal claims it had yet to settle should cost between US$1.4bn and US$4bn, having paid out US$6.4bn so far.
Bankers said that other parts of their strategic equity businesses have seen an uptick this year, which has helped offset year-on-year declines due to reduced Visa-related trading revenues.
“For certain banks it's been a substantial transaction; for others less so,” said the third senior equity derivatives banker. "As Visa winds down, I think certain dealers will have a need to replace the P&L with other things."