Corporate financing woes spell more trouble for banks

We’re heading into the ninth month of the credit crunch, and there still hasn’t been any issuance in the European high yield market. Investment grade companies are also having serious problems getting anything done in Europe, and any brief rally in risky assets is being viewed as a window of opportunity to issue bonds. On Wednesday, for example, we saw £500m of issuance from Citigroup, £500m from Standard Chartered, €850m from Dutch telecom company KPN and €650m from French supermarket company Casino. Yesterday, Diageo jumped in with a €850m deal, Thames Water issued £400m, AT&T issued €1.25bn and BNP Paribas issued €3bn. These deals are coming to the market at a significant premium to where CDS and existing bond issues trade from these companies, and at considerably wider levels than seen over the last few years.

There is still a huge number of companies desperate to raise finance. A number of companies have sought alternative means. Richard recently wrote here about how Porsche managed to draw on a bank overdraft facility at very favourable terms. Last week, the battered US consumer finance company CIT Group announced that it was drawing on a $7.3bn credit facility from its banks, for which they are rumoured to be paying around 0.4% to 0.7% over LIBOR. This bank facility is a bit of a coup for CIT Group, if you consider that CIT Group 5 year credit default swaps are currently trading at 990 basis points, and CIT bonds maturing in 2012 yield about 13%. (Incidentally, S&P and Moody’s rate this bond A- and A3 respectively, suggesting that either the ratings agencies or the market has got it a bit wrong).

The clear losers from these credit facilities are the banks. The banks offered credit facilities to companies when times were good. Now that times are bad, banks are contractually obliged (subject to ratings downgrades, which may void this contract) to lend to borrowers that may be distressed, and they are lending to vulnerable companies at rates that AAA rated corporates would struggle to achieve in the bond market right now. Clearly the implications for banks is a further squeeze on profits.

The value of investments will fluctuate, which will cause prices to fall as well as rise and you may not get back the original amount you invested. Past performance is not a guide to future performance.

Stefan Isaacs

Job Title: Deputy CIO Public Fixed Income

Specialist Subjects: Bonds

Likes: Football, travel and the prospect of retirement

Heroes: Sir David Attenborough, Bill Shankly and Theodor Herzl

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