The Future of Capital
Top quality issuers boost debt capital markets
Even governments face supply constraints
In December 2008, the Bank for International Settlements reported the latest data it compiles assiduously on cross-border bank claims – essentially lending – for the second quarter of 2008. It found that these had shrunk by $1.1 trillion, a number it describes as simply "unprecedented".
The decline in banks lending to other banks accounts for a large proportion of this, fully $812 billion. That overshadows a decline of $286 billion in cross-border bank claims – 80% in the form of loans – to non-financial borrowers.
And that, remember, was in the second quarter of last year – before things got really bad.
Banks are now in the business of reducing risk-weighted assets, not building them up. Also in December 2008, the Institute of International Finance, an industry body for the world’s largest banks, published a report on the state of the capital markets, highlighting the fact that spreads of interbank rates over policy rates had started creeping up again, perhaps in a year-end effect; that banks’ credit losses on actual bad loans were beginning to exceed their mark-to-market losses on toxic CDOs and other structured securities and that these loan losses are only likely to get worse in 2009.
While the good news for bank treasurers keen to ease funding concerns was that the US commercial paper market had revived, this was entirely due to Federal Reserve intermediation.
Through the IIF, the world’s biggest banks made an extraordinary plea that the US government should now consolidate its myriad support and guarantee programmes into one public asset management company to buy troubled assets from the banks.
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US Bank Losses* |
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Source: IIF |
How big would this have to be? The IIF says: "To be effective, such asset management company has to be appropriately sized – perhaps to the tune of $3 trillion to $4 trillion to sufficiently cover the range of troubled assets."
This voice crying out for a vehicle to dig it out from under $4 trillion of its garbage assets is not that of a banking system ready to do any new lending.
On December 8, BNP Paribas reopened the euro market for non-government guaranteed senior, unsecured bank debt with a €1.5 billion five-year deal paying 160 basis points over midswaps. It was the first such deal since the default of Lehman Brothers and since European governments announced their programmes to guarantee bank debt in October. Paul Hearn, global co-head of origination and distribution, fixed income at BNP Paribas, was soon taking calls from other banks. "What struck me is that they weren’t particularly interested in the spread we’d paid, they were more intrigued by the fact that we’d got a deal done at all. And in a way, I find that rather worrying."
He says: "The government moves to guarantee bank debt were born of necessity and carried a hope that, before long, the guarantees on shorter-maturity debt would bring comfort to buyers of longer-dated bonds and allow banks to issue again without guarantees. But it hasn’t quite worked like that. As each day goes by, we’re getting more concerned, not less. The number of banks in the world that could do non-guaranteed deals tomorrow is very few. And even in the guaranteed space, just sticking a guarantee on bank debt doesn’t automatically make it an easy sell. The market is now pricing in huge supply and pricing is deteriorating in some cases."
The day after Euromoney spoke to Hearn, the market was awash with rumours that a German bank had been forced to postpone a government-guaranteed bond deal, delaying launch to this January after a poor initial reception.
At the IMF meeting in Washington in 1999, Alan Greenspan announced that he had learnt the lesson of the Asian financial crisis and it was that countries needed both robust banking systems and robust capital markets so that if an unforeseen event closed one, the other could fund the economy.
Both the banking system and the capital markets are broken today. Greenspan failed even to mention the third source of funding needed to sustain economies in a crisis – government funding. The message today from the point where the first two squarely meet – bank funding in the debt capital markets – is that if the two financial systems are in a race to repair themselves, back the banking system to finish second.