Credit Crunch Leaves No Debt Market Unscathed

Anyone who has paid even a wee bit of attention to the business press no doubt has gotten the message that there is a world of hurt in the debt markets. But both optimists and skeptics might wonder: is there an element of reporting fallacy? Are there sectors that are OK but have gone unnoticed because reporters focus on train wrecks?

An article by Paul Davies in the Financial Times describes how widespread the pullback has been:

Global debt issuance collapsed in the first quarter as the credit crunch took its toll on new deals in all sectors from structured finance and riskier high-yield bonds and loans right up to sturdy investment-grade corporate debt, according to new data.

Total debt market volumes were $1,030bn in the first quarter, a 48 per cent drop compared with the same quarter a year ago, while total syndicated loan market volumes were $599.bn, a 47 per cent drop versus the same period last year, according to Dealogic, the data provider.

The numbers illustrate how the withdrawal of liquidity from the world’s debt markets in the wake of the turmoil that began in the US mortgage markets has affected everything from the safest corporate borrower to the most risky private equity backed leveraged buy-out deal.

Structured finance markets, which cover mortgage-backed bonds and complex products such as collateralised debt obligations, unsurprisingly suffered the worst contractions.

Globally, new deal volumes of just $81.5bn were 89 per cent less than the first quarter of 2007. This volume was the lowest since the first quarter of 1996.

The outlook for bankers’ jobs in this sector was also put under a cloud with news that revenues generated by structured finance were the lowest since the third quarter of 1995, when a fraction of today’s armies of professionals worked in the field.

Bankers and analysts said the outlook for most areas of the debt markets remained fairly bleak for the next quarter and probably the rest of the year.

Suki Mann, credit strategist at SG CIB, said that the investment grade companies in Europe, which have been least immediately harmed by the credit crisis so far, would continue to shy away from issuing new debt while markets remained so rocky.

“We think corporates can continue to hang on,” he said. “Their liquidity position remains quite strong and banks in Europe continue to lend on a bilateral basis.”

Within the loan markets, the leveraged loans that fund private equity buy-outs saw the biggest declines with volumes down 84 per cent to just $46.9bn worldwide compared to the first quarter of 2007.