To anyone predicting a fall-off in issuance volumes and general spread widening in the wake of the GM/Ford sagas of last year, the market's resilience will have come as something of a surprise.
The debt capital markets have shrugged off all the foreboding that was creeping into dealers' psyches with alacrity and deal flow has continued apace at levels that still have portfolio managers concerned about where their next few basis points are coming from.
The fact that borrowers had little choice but to persevere with funding plans established before the first ructions became evident goes a long way towards explaining the volume side of the equation. The fact that spreads remain resolutely tight amidst consistently strong demand is perhaps more telling.
The momentum flowed over into the first quarter of 2006 and has been evident across asset classes. In the SSA sector, where front loading of issuance has become the norm over the past five years or so, to see such volumes is unsurprising. In other areas, it has come as more of a revelation.
The subordinated FIG sector is a case in point, with the hybrid market more active in the first couple of months of the year than most had predicted. Historically a blackout period for a number of institutions ahead of results releases, the benign environment proved too seductive to resist and more traditional mores were ignored as borrowers launched transactions that were, to all intents and purposes opportunistic, a concept not often associated with an arena more used to strategically planned offerings.
The irony is that one of the areas in financials actually tipped for huge volume in 2006 is currently on hold as the National Association of Insurance Commissioners considers its verdict on whether some issues count as common or preferred stock.
With this avenue closed for the time being, borrowers may have to look for alternatives. If the market has proved one thing of late, however, it is that it is resourceful. When one door closes, another opens.
The retail bid has been continually strong and could pick up some of the slack. This is a situation prevalent not just in the US; issuers could find themselves on roadshows in parts of the world they had not initially contemplated visiting. The Asian retail market, for example, has offered opportunities for unrated and high-yield names alike, the combination of name recognition and chunky coupons proving the ideal mix for cash-rich investors looking for incremental yield. While rising US Treasury yields are predicted to drain some of this demand, the prospect of a household corporate name at a double-digit premium is likely to be tempting.
With acquisition announcements running close to record highs, corporate bankers may well be in a position to test the depth of this demand, although the bulk of this issuance is unlikely to be seen before 2007. Hands have not been idle in the meantime, however, as the search for universally acceptable covenant packages continues. The stage is set, the players awaited.