Capital markets will stay open

IFR 1933 12 May to 18 May 2012
6 min read
EMEA

IFR Editor-at-large Keith Mullin

IFR Editor-at-large Keith Mullin

CORPORATE DEBT REDEMPTIONS plus new-money requirements over the next five years are creating a US$46trn credit overhang that might not necessarily be wholly financeable, according to a report published last week by S&P. To put it into some sort of context, that number is equal to the aggregate annual economic output of the eurozone, US, China and Japan. That’s pretty scary.

The IMF is projecting global economic growth of 3.5% this year. What it calls the advanced economies are projected to grow 1.5%, while developing economies should register growth of 5.75% – accelerating to 6% in 2013. Corporates play a key role as agents in that growth. Someone’s got to fund them in order to achieve expansion, so the question as to whether finance will be available is certainly a valid one.

The sheer amount of financing to be done sounds like a hell of a lot, and it shows what a leveraged and financially fragile world we all live in. But for those of us who’ve been around for a long time it’s nothing really new. And to reframe the context above, financing requirements – refi plus new money – are equal to less than 20% of the GDP of the countries listed above over five years.

S&P asks rather provocatively if a US$46trn perfect storm is brewing. But it quickly acknowledges that its base case actually isn’t to the downside, but merely that there are financing and refinancing risks out there framed by “a volatile geopolitical climate that is causing skittishness in financial markets”, and reduced fiscal and monetary flexibility at the level of governments and central banks to prevent serious problems emanating from future market disturbances.

THE REALITY IS that almost every year someone comes out with scary statistics and projects some sort of potential doomsday scenario around the ability of the global capital and bank markets to fund corporate maturities and new money. But I’m struggling to come up with times where it’s been a really acute problem and where markets have simply shut down for any length of time.

Constrained access to bank or investor liquidity tends to show up in pricing, particularly in the latter case and even there higher pricing demands are invariably opportunistic. In the past, and to some extent still today, banks have been slaves to relationship banking models that haven’t been too discriminatory when it comes to how credit availability interacts with margins.

Since the financial crisis, though, banks are actively re-evaluating their relationships and are much more willing to reprice or even exit if they’re not value-accretive. That may leave financing gaps in some quarters.

You do wonder what the impacts will be of a developed world economy broadly focused on austerity rather than growth, recession in parts of core and peripheral Europe, higher bank capital adequacy, widespread bank deleveraging, tighter RWA management and lending “de-globalisation” in Europe.

What effect will the removal of large swathes of available bank finance have on the ability of corporates to finance capex and investment in new plant and capacity etc, particularly if those effects are long-run?

Almost every year someone comes out with scary statistics and projects some sort of potential doomsday scenario

To the upside, though, corporates are much better placed with regard to cash balances, certainly than they were at the time of the global financial crisis of 2007–08 when some got burned as banks struggled to fund drawdowns of contingent stand-by facilities. And corporate bond markets, particularly in the US but also in Europe, remain open for business.

Breaking S&P’s numbers down, the US$46trn it put out includes an annual refi target of US$6trn and an annual new-money target of up to US$3trn (which it believes is more at risk).

BEFORE THE FINANCIAL crisis, syndicated loan volumes were running at US$4trn to US$4.5trn per year. Following dips in the following three years of crisis and post-crisis, volumes are on the way back. In 2011, banks syndicated US$3.5trn and – on the basis of the first quarter of this year – they’re tracking a similar amount for full-year 2012. While that’s not all corporate, the majority is.

And of course, that number excludes the bilateral and overdraft facilities that SMEs tend to rely on through the business banking divisions of their lenders, as opposed to the investment banking and markets divisions where multinationals and top-end corporates are banked. The number also excludes commercial paper, trade finance/countertrade, commodity-backed lines and asset-based finance, which the data just don’t pick up.

Corporate debt capital markets add another annual US$700bn to the total, and that number largely excludes MTN trades and private placements. Global ECM volumes in 2011 were US$500bn. And public capital markets data excludes activity by private equity and other forms of alternative finance, such as pre-IPO lending by hedge funds and institutional capital pools.

In short, it’s almost impossible to get the maths to add up using public capital markets data, which represents the tip of the funding iceberg. There will undoubtedly be casualties of a more analytical and qualitative process of capital allocation, predominantly among SMEs in both developed and developing economies. However, their access to finance has always been slightly more precarious.

Net-net, excluding the impacts of a major shock that wreaks disorder on world financial markets and on the basis of available liquidity relative to need, I’m not sensing a coming financing crisis. But the situation is volatile and stands constant scrutiny.

Keith Mullin 100x100
Keith Mullin with border 220