This year's IFR Top 250 Borrowers report comes in the aftermath of the most serious dislocation in credit markets for years. The GM/Ford downgrades to junk spooked a market that had seen one-way traffic for years in terms of credit spreads.
As all credit product continued to tighten into uncharted territory, real money and hedge funds had looked to add any of all of duration, structure, leverage and credit risk into their portfolios to generate some yield pick-up.
When the market turned on the GM/Ford news, everyone was caught on the hop. The secondary market tanked, and hedge funds got caught out by correlation trades that went badly wrong.
The big question was: did the Ford/GM events presage a wider malaise that would lead to a new pricing paradigm? Bear in mind that Telecom Italia's tightly priced 50-year bond had crystallised opinion – not that the market needed it – that the risk-return relationship in bonds had completely eroded.
That said, the huge supply/demand imbalance remained more or less intact, and was therefore still supportive of tight credit fundamentals. It was a hard market call.
The answer wasn't too long in coming. By the end of May, secondary volatility had subsided to the extent that by early June, bond syndicators were able once again to push out new product. In essence, the market took the disruption in its stride, as it had taken the serial increases in the Fed funds rate. The apocalypse scenario was put back into the box for another time. Spreads to mid-June were largely as they had been in late March.
If anything, the recovery was being touted as a buying opportunity. Certainly, if the woes in the investment-grade bond market crossed over into other credit asset classes, they were by no means as severe.
European leveraged finance, for example, continues to be heavily in vogue (although the market is a little more name, structure and sector specific). The ISS situation – where the LBO bid sent the bonds into a tailspin – proved beyond doubt that buyouts were bad news for senior bondholders, but the huge liquidity at the LBO market's disposal has pushed the pain barrier in terms of leverage multiples ever higher.
Private equity firms are flush with cash – new funds continue to break records – and hedge funds have increased their allocations to the LBO market. The result has been increasing competition for assets and higher prices. There has been an important shift in the mindset of LBOs shops. With the huge liquidity has come a willingness to club together.
The league tables in this IFR Top 250 Borrowers report cover the May 1 2004 to April 30 2005 period, one of the most amenable periods for borrowers. We've provided snapshots of all of the major markets – credit, leveraged finance, syndicated loans, FIG capital, SSA borrowers, securitisation, and convertibles. And as in previous years, we've included a series of borrower profiles.