Looking back at the past year, it would be easy to summarise the events of 2010 as the global financial crisis Part 1 – the one created by financial market professionals, sleepy regulators, institutional investors and artificially low interest rates – giving way seamlessly to potentially an equally pernicious, tumultuous and damaging global financial crisis Part 2, this time created by profligate, over-indebted European sovereign governments.
There’s something very disturbing about the notion of governments going bust; it undermines the sense of order and security that make sensible decisions possible. The pervading fear at the end of 2010 is that the euro may not survive any of the peripheral members being ejected or defaulting, or Germany deciding it’s had enough and, for domestic political reasons, engineering a new currency order in Europe.
What issuers, underwriters and investors in the world of investment banking and capital markets were expected to make of these fundamental issues in 2010 is a good question. Not surprisingly, financial markets were seized by bouts of extreme volatility or simply shut down during chunks of the year, and market sentiment gyrated very quickly from bullish to bearish, sometimes on nothing more than gossip or half-baked interpretations of half-truths.
To add to the confusion, the regulatory and supervisory debate rumbled on. Stress tests, Basel III and EU capital requirements, the “too big to fail” issue, counterparty risk management and liquidity ratios were all hot talking points that had banks tweaking their strategic and tactical plans in order to optimise their interpretation of the new world.
Issuers and investors also had to wrestle with the environment of extremely low yields brought about by quantitative easing in the US and UK, and accommodative monetary policy conditions elsewhere. This pushed investors throughout the year into yield-seeking areas of the financial markets.
Long-dated bonds, corporate hybrids and unrated corporates saw a marked pick-up, but interest in emerging markets (both G3 and local currencies) and high-yield debt surged in 2010. In light of the prevailing macro-negativity, this was perhaps counter-intuitive, but at the end of the day, investors needed to generate some semblance of return.
Debt capital markets issuance in 2010 was broadly characterised by opportunism as issuers moved to take advantage of arbitrage windows to raise cost-effective money, but there were at the same time many marquee trades. It was much the same with ECM, with a host of landmark and record-breaking transactions from around the world. Banks tended to play it safe, and the syndicated loan market only slowly started to move back into underwriting mode. LBOs, particularly in the US, staged something of a comeback, but this may be a story for 2011.
Given all the noise, it is remarkable that capital markets issuance volumes didn’t fully reflect the risk-on, risk-off year. If you add up all capital-raising in the year to mid-December, issuers raised US$5.7trn across global debt and equity markets – not far shy of the US$6.3trn raised in the same period of 2009 when low rates, a resurgence of buyside liquidity and an absence of any major financial threat created an almost perfect issuance backdrop.
In other words, for all of the macro-gloom and the regulatory uncertainty, 2010 proved another remarkable year for the financial industry.