If one word has to be chosen to describe the atmosphere of the market since the start of 1998, frustrated is more accurate than panicked. Although the international capital markets have seen almost a decade without the unparalleled financial turmoil of the past six months, MTN experts are managing to keep their cool. For new issue MTNs, flows have been lacking with February this year being the month in which they almost dried up altogether. There have always been trades to do, it's just that there are lots of dealers chasing them. Dealers complain that the quality of trades has been poor and subsequently, so have their fees. Resentment from primary market towards secondary market MTN desks has grown since they have seen more action due to cheaper prices. Yet the general feeling is that this isn't a market crisis but an uncomfortable dip in an upwards curve and this is shown when one dealer jokes: "If things don't pick-up soon, I won't be able to afford my Ferrari at the end of the year." Japan, or at least the lack of it, has been the talking point of the market over the past quarter. But, the exact reason for its absence is a bone of contention. There are those players who say that the Asian crisis is to blame, others who think that Japan is slowing down because of the year end, and many who think it's just a bit of both. Yet it cannot be denied that the Asian contagion has had far reaching effects: it will be some time before the memory of the head of Yamaichi weeping on world-wide television is forgotten. Banks with exposure to not only Japan but to Asia as a whole have seen their ratings downgraded as a result of poor credit quality. And there are some dealers who still predict a trying time for non-Japanese Asian banks. Standard & Poor's does not expect to see Japanese banks in a more favourable light, at least in the medium-term, despite regulators' stabilisation efforts. According to the agency, what market players call "the big squish" (allowing weaker Japanese banks to fail) may help restore confidence in the Japanese system in the long-term. But the process will take time and may result in further pressure on ratings in the interim. As for the Japanese investor base, there are still those investors who are interested in the Euro-MTN product. Admittedly prices in the domestic market have been tempting Japanese investors away from off-shore markets so far this year. But dialogues between dealers and investors have been more numerous and of a more optimistic note towards the end of the quarter. With investors in general, there has been a noticeable flight to quality. Triple-A rated paper accounted for approximately $7 billion-worth of trades in the second quarter of 1997. This figure has risen more or less steadily to $15.2 billion for the first quarter of 1998. On the flip side, double-A rated MTNs have declined over the past year whilst single-A issues have remained constant. Currency-wise, no one feels that the Asian crisis has been so bad as to trigger the demise of yen but it is likely that it will not dominate the Euro-MTN market to its previous extent. One way this is forecast is by noting the present decline of yen-denominated trades. Although the table of Volumes for top 10 currencies for the past four quarters still places yen in overall pole position, dollar issuance surpasses that of yen during the first quarter of 1998. The volume table of JPY issuance underlines this relative decline. In the light of the fall in yen, European currencies are rising. The move towards Economic Monetary Union (Emu) is also partly responsible for this trend. The figures show that Ecu issuance over the past four quarters has steadily grown. Similarly, escudo is going from strength to strength. Once Emu has reached fruition, European currencies will receive even more of a boost. The opening up of domestic markets, such as the French and Spanish markets which currently produce synthetic deals, will make this even more the case. Exotic currencies are also becoming more popular. Looking at the past three months, a big shock is the amount of South African rand-denominated trades issued since the beginning of 1998. Rand has been placed in the table of top 10 currencies, volume-wise, for the first time. More issues of rand have been made than of Hong Kong dollars, French francs or Belgian/Luxembourg francs, which is surprising. On the origination side, desks have continued to be active. There has been a drop off in signings this quarter compared to the first quarter of 1997, but it is slight. There is less in the pipeline too. Yet there has been a noticeable change in the type of new borrowers coming to the market. They are tending to need more guidance than before since the sophisticated issuers already have programmes. Frequently they do not already have a rating since they are coming less and less out of mainstream areas. The number of Latin American programmes recently signed shows this. The number of issuers looking to set-up facilities is higher than previously and originators expect more prog-rammes to arrive towards the end of this calendar year. Most traders are equally optimistic regarding the rest of 1998. The most telling period will be the next few weeks following the year end. Although, when asked if the second quarter of 1998 will be better than the first, one trader says: "It couldn't get much worse."
July 28, 2000
