It has been an extraordinary year for the debt capital markets. Just over a year ago the world economy flew so close to the flames that it seemed like complete meltdown was the most likely outcome. In the aftermath, most markets ceased functioning in any meaningful way. The loan markets went into a paralysis from which some are still tentatively emerging, while even those that resumed business more quickly have shrunk. The equity markets went into freefall, and though they have since bounced back, opinion is sharply divided over how sustainable that recovery is. Even the bulls would have to concede it will take years before they get back to where they were.
Structured finance was dealt a mortal blow from which it will never fully recover: its challenge will be to adapt into something less opaque, while maintaining its usefulness as a source of funding. Similarly, derivatives have had a disastrous time from a PR perspective, and must work hard to recover the confidence of politicians and regulators, which have set them in their sights.
DCM alone stood up at the end of 2008 and into early 2009 to provide the funding needs for a broad range of issuers – and an increasing breadth of uses. In a year that has seen it prove hitherto unknown versatility, bonds have been used to finance M&A – stealing market share from the loan market – as well as enabling put-upon companies to repair their balance sheets.
Of course, it would be wrong to imply DCM rose above the wreckage to continue functioning unaffected. The cost of doing deals rose sharply – though it normalised quicker than elsewhere. The door was also slammed in the faces of lower rated credits – though again, those weaker credits were admitted into the bond markets before they found the doors open elsewhere.
There were also inevitable geographical variations: the high-yield market was up and running in the US before Europe; Asia recovered quicker than Latin America; Japan remained open when the crisis reached its crescendo elsewhere, but declined as other markets perked up.
Now there is talk of new bubbles forming. The covered bond market is currently as busy as it has ever been, prompting concern among some that the ECB has created another potential problem, the effects of which will be visited upon the beleaguered markets once its purchasing programme comes to an end. Of even more concern is how markets will respond to the removal of government support from banks.
The markets are still in a state of flux, and it remains to be seen how the landscape will have changed once things settle. But whatever happens in the next 12 months, the world economy will owe much to DCM, which for many months was the only place governments, agencies and companies could find capital.