"A short while ago we had a transatlantic takeover a client wanted to undertake. It wasn’t that big but we simply couldn’t get enough firepower to bridge the loan between the four core relationship banks. Strategic ambitions have to be changed," says an investment banker.
Another banking official says: "We have a client that approached us to help finance its share buy-back programme. We simply had to say: ‘No it’s not of enough strategic importance’."
It is not just M&A and share buy-backs that will be curtailed by the broken financial markets. BHP Billiton pulled out of its takeover of Rio Tinto because of the $55 billion of debt financing the acquisition entailed. It is capex, the debt that is used for dividend payments in the sponsor world – it is even the refinancing of outstanding bonds or existing corporate loan facilities that corporates will struggle to implement. In October investment grade corporate bond issuance fell 71% to $83.5 billion. The market has since shown tentative signs of life, which will be a relief to those firms facing a significant debt obligation maturity in the coming year. Undrawn credit facilities might not be the get-out-of-jail card that many treasurers once thought they were – even if your counterparty is able to cough up, it might choose not to – citing a hidden material adverse clause.
"We think that as public sector and related issuance rises through 2009, corporates will find it increasingly challenging to access the public markets. The majority of corporate debt (60% to 70%) is in the form of loans with banks, who are increasing less willing to roll it. As such, a significant portion will need to be re-financed in the public markets. Adding this to the amount of corporate redemptions over the next few years, clear pressure points will be created," says Spencer Lake, global head of debt capital markets at HSBC.
The debt of banks has become quasi-government, thus guaranteeing them access to liquidity. But what of those left outside, beyond the scope of financial sector bail-outs? It is hardly surprising that in the past few weeks credit spreads have remained weak and that stock markets have retraced their lows.
For much of this crisis, corporate credit risk has been a relative haven, especially during the period when liquidity and systemic risk hit financial institutions. As predicted, however, the crunch is now starting to hit the real economy. Rapidly deteriorating growth and employment prospects worldwide are bound to slow corporates’ cashflow generation. Also, as governments have been forced to inject capital into banks and guarantee their debt, unintended consequences have kicked in. Markets have searched out the next weakest entities – and those corporates with substantial wholesale funding gaps have come under pressure.
As the crisis has hit one area, the focus has moved quickly on: asset-backed commercial paper, the term securitization markets, commercial paper, inter-bank money markets, credit default swaps and counterparty risk have all caused panic; next it is corporates’ turn to cause havoc.
Many companies have limited financing options, and not necessarily because they are poor-quality credits. Capital markets have suffered near-mortal blows over the past year or so as once-reliable sectors such as commercial paper, bond and loan markets have become highly constrained and extremely expensive to fund in. And there is little evidence that the markets will improve dramatically in the next year or even beyond that.
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"Corporates facing a bond maturing in the medium term will be concerned about refinancing risk"
James Forese, Citi |
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"Corporates facing a bond maturing in the medium term will be concerned about refinancing risk," says James Forese, co-head of capital markets, Citi.
It is a threat that is also worrying the rating agencies. Moody’s says that the capacity of the capital markets and the availability of bank facilities to provide fresh finance and to refinance corporates rated triple B and below is questionable over the next six to 12 months.
Tough times
Perhaps it is understandable under the circumstances that triple-B credits will find finance rationed. But when a triple-A rated institution such as GECC is the recipient of US government largesse, in the guise of the Federal Reserve’s commercial paper funding facility, you know times are tough. Way back in 2001, GECC funded half of its debt in CP – which amounted to a little under $120 billion. It was forced to reduce this reliance because of investor and rating agency concern following the rapid withdrawal of short-dated liquidity to various companies when the tech bubble burst. Seven years later, GECC is again scaling back its use of CP, from $100 billion at the start of this year to $80 billion at the end – it has $88 billion of CP outstanding.
In the term debt market, GECC has approximately $120 billion of bonds falling due in the next two years, according to Dealogic – the largest wholesale funding gap outside the traditional bank world. It is a good thing it did not sit on its hands when the credit markets first began to show signs of stress. Euromoney has acknowledged GECC’s professionalism in recognizing changed circumstances and willingness to fund through the cycle (see Euromoney page 85, June 2008). Imagine how bad things would now be for GECC had it deferred issuance plans and tried to wait for conditions to improve, as many other companies have?
Given the scale of the challenge ahead of it, there were serious doubts that GECC would be able to refinance without additional government intervention.
In early November investors panicked: three-year GECC euro- and sterling-denominated paper changed hands at an incredible 75 cents on the dollar – equivalent to a 17% yield. It was shortly after that trade that GECC said it would use the Federal Deposit Insurance Corp’s temporary liquidity guarantee programme, possibly to the tune of $139 billion of GECC debt. Fortunately for GECC, it is eligible for the guarantees because it owns FDIC-regulated bank institutions.