It has been the most difficult year in living memory for finance. Less than twelve months ago, many bankers were still optimistic that they would arrive back at their desks for the New Year to be greeted by a newly resurgent market. How naïve that seems now.
The change has been so dramatic that it has left CFOs’ heads spinning. And as the year marches towards its conclusion, a number of questions dominate peoples’ thoughts. How much longer must the markets endure this torrid punishment? And, just as crucially, when the dust settles and the shockwave from the credit crisis has died down, what will be the new cost of borrowing?
Even before the summer of 2007 it was not uncommon to hear of a growing dislocation in the price of risk, and that spreads, which had steadily tightened like a vice, could not continue on that trajectory. But identifying the problem has been much easier than solving it. There is no knowing if things are even heading back in the direction of fair value, or if conditions will get worse before they get better.
This leaves companies with an unenviable dilemma: should they finance at current levels – if, indeed, they can – or should they wait to see if things pick up?
For obvious reasons, the troubles have led to a concentration of activity in short-dated debt. As always, life is tougher at the lower end of the credit spectrum, but it has been among the strongest credits that things have been most interesting. It is hardly surprising that weaker credits have a tough time funding when there is so little confidence in the system. Much more significant has been the inability of some of the more reputable companies – those that have long nurtured good relationships with the banks – to get deals done at levels they consider reasonable.
The financial sector has been especially hard hit, a fact that is particularly worrying given how reliant the rest of the economy is on a functioning banking system. It is barely possible for market participants to keep pace with the failures of institutions around Europe and the US; regulators and legislators confronted with the same problem have the more daunting task of also trying to arrest those problems.
Yet the troubles have not been indiscriminate: there has been a flight to quality in the debt markets, and as the financial sector’s weaknesses have been exposed, the relative appeal of the SSA sector has grown.
What remains painfully clear is that the crisis is far from over and this Christmas there is likely to be far less optimism to accompany the roast turkey. There are few better examples than the covered bond market, which enjoys the support of governments and a conservative clientele around the world. Yet for all its strengths, the implosion of two major issuers has cloaked the market in uncertainty.