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Capital Markets

Timing the pounce on tight credit spreads

Issuers want to take advantage of tight spreads but are afraid of building up spare cash. Banks are touting new pre-hedging derivatives solutions for those reluctant to issue. Should companies take trading views on their own credit?

PROCRASTINATION IS THE thief of time. Carpe diem. For centuries, poets, statesmen and wits have warned of the dangers of delay and urged us to act now. But when it comes to issuing debt, banks are devising new tools to help corporates put off until tomorrow what they could be doing today. If corporates respond, they will be moving closer to taking trading positions in their own credit and using credit derivatives as banks and investors do.

The logic behind this is simple. Credit spreads are tight. But if issuers pre-fund and put the money raised on deposit, they pay the cost of carry and risk upsetting equity analysts and creditors, neither of whom likes to see borrowers with large amounts of spare cash.

So, can issuers capture current spread levels for their future funding without paying the cost of carry or grossing up their balance sheets? The banks say they can. Issuers just need to apply pre-hedging technology to credit.

This reflects a new way of thinking about debt. "The old view was that equity was the permanent part of your capital structure, and debt was the loose change in your pocket that comes and goes," says Eirik Winter, head of European corporate DCM at Citigroup.

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