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Issuer's £280m deal was cleverly marketed
With equity returns under strain, managers would do well to slow the pace of CLO issuance
Issuance has kept going by giving investors just what they want
John Healey resigned because the money was not there for defence. It may not be there for anything
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Close to a month after the rescue of Bear Stearns and ahead of the Fed’s rate decision tomorrow, sentiment has improved significantly in the European credit markets. It’s hard to know why — the prospects for the US and European economies do not look a tremendous amount better. But the bond new issue market suggests that — for now at least — risk appetite is back.
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The remarkable recovery in US and European credit markets in the past month is not justifiable by any good news or fundamental change. Investors and dealers are now treating the glass as half full rather than half empty — but they should watch out. There is plenty more bad news to come, such as Alt-A defaults, and CDS indices and bond prices could turn bearish again.
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One of the most senior European loans bankers, Julian van Kan, has suggested that to cope with the widely publicised shortcomings of Libor, the loan market should go back to a system used in the 1990s. But setting loan rates privately or on an ad hoc basis would cloud the atmosphere, rather than helping to clear it. Banks and borrowers should face up to the fact that loan margins should reflect the lenders’ funding costs.
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The biggest and best issuers from central and eastern Europe have reopened the region’s international bond market in recent weeks — Gazprom, Evraz, Halyk Bank. Non-blue chips remain excluded, or consigned to the high octane private market where the risks are as steep as the coupons. So why is Morgan Stanley bringing a public deal for a single-B rated Azerbaijani debut issuer? You have to admire their pluck.
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The draining of liquidity from the loan market is polarising banks according to their attitudes to borrowers. While the relationship factor has always been the big driver, yield is becoming much more important, especially for the investment banks that use credit default swaps to hedge their portfolios. They are reluctant to lend at margins below lenders’ CDS spreads, and are therefore simply saying no to deals.
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Sir Fred Goodwin is right to make a speedy U-turn and raise capital ratios at RBS. The bank has been able to get away with low capital ratios in the past because of its high profitability, but investors should welcome a more conservative approach amid stormy global credit markets and a deteriorating UK economic outlook.