In what ways have the debt capital markets been changed most significantly by the credit crunch?


Alex Chambers
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Roberto Isolani, joint head of global capital markets at UBS
The dynamic between issuers and investors has changed completely. Investors now have all the power and issuers have had to become much more realistic in terms of pricing. At first, they were in denial about the collapse of the markets, but have since come to accept that the living was just too easy pre-August 2007.

Jim Esposito, head of syndicate and debt financing at Goldman Sachs
The deepest pockets of available liquidity have been pushed further out the maturity spectrum. Over the past couple of years, the short end of the primary market (eg 18 months to three years) has absorbed approximately 50% of investment grade supply. Since this period of credit volatility started in July, we’ve seen a lot less activity in shorter maturities and much more frequent issuance in 10- and 30-year maturities. It used to be rare to see a financial borrower issuing a 30-year whereas now it has become commonplace.

Eamonn Price, former head of FIG capital markets at Lehman Brothers
In terms of the FIG sector, issuers are far more careful, thoughtful and deliberate about accessing the markets. Their assumptions about balance-sheet growth and business activity are dominated by what funding they can access rather than considerations about the asset side of the balance sheet. People had thought about market share: what’s our funding position? What’s our capital position?

The floating-rate note (FRN) market was incredibly buoyant – now that’s come to a halt. All the banks are husbanding their liquidity incredibly carefully.

It’s going to take a long time for people to forget what they have gone through here. Certainly it will be a number of years before leverage returns to the short-end market. Everybody has worked out that the duration mismatch was good for earnings but the risk it put the balance sheet under was probably imprudent.

Jean-François Mazaud, deputy head of capital raising and financing at SG
First of all, the investor base. The relative decrease of hedge funds, money market funds and banks in order books has changed the absolute size of demand as well as the approach to pricing. More importance is given to credit fundamentals before opining on a given price range.

Short-dated FRNs have slowly reappeared, but at prices that reflect strictly current market conditions. Price discovery is properly conducted. Whatever the format of the bond issued, it is extremely rare to see deals thrown to the market at a price that does not reflect the market price at which investors are ready to buy.

Siddharth Prasad, head of EMEA FIG capital markets and financing at Merrill Lynch
Liquidity and capital have become strategic parts of dialogue with clients. Investor (debt and equity), issuer, regulatory and rating agencies’ have been focused on access to liquidity and sufficient capital. The near shutdown of structured credit markets, including ABS. Central banks acting as liquidity provider of last resort. Differentiation of issuers that can access the market, ie best in class and regional champions. Pricing power moved from issuer to investor. There is much more discrimination over credits. Investors once purely chased yield, now they are being much more selective. Tiering within jurisdictions and secondary trading is not a real comparative but rather CDS and the last relevant trade that printed. Higher level of pre-sounding prior to trade announcement. High-level domestic sponsorship in the new issue market. Significantly lower flow in secondary trading at wider bid-offer spreads. Issuer fees - less expectation by issuers to underwrite transactions with negligible league table deals. Issuers want correct placement and are willing to pay for that advice. Issuers have been much more selective and resourceful in tapping non-traditional markets such as Swiss franc, samurai and Schuldschein. Another interesting development has been corporates looking beyond their lending banks for issuance opportunities.

Chris Tuffey, head of EEMEA debt capital markets at Credit Suisse 
The investor base has changed significantly– the lack of cheap leverage has seen a reduction in leveraged funds in new issues. The new valuations for credit and the collapse of the structured credit market has seen private bank, mutual fund, insurance and pension money become the key account base in corporates and financials. Also, in the triple-A business, a broader range of buyers has emerged. We have also seen the narrowing of alternatives for borrowers; the US dollar market has seen a very significant increase in volumes in comparison to other markets – witness the record August 2007 and April 2008 volumes.

Martin Egan, head of primary and global head of debt capital markets at BNP Paribas
Appetite for risk-taking among banks has changed dramatically. A conservative approach dominates, at least for the time being. Greater discipline overall and engagement of key investors have moved to the next level. Risk departments have greater control. A number of traditional primary-focused banks have stepped back while numerous professionals have left the business.

Miles Millard, European head of debt capital markets, Deutsche Bank
The debt capital markets will always experience bull and bear cycles of differing magnitude. We will probably not see a debt market driven by such levels of leverage ever again.

Stephen Jones, head of European financing solutions group at Barclays Capital
Concentration of business – with market share shifting towards the banks that can provide ongoing liquidity and certainty. There is a focus on counterparty risk both by issuers and investors alike. Clients are now very aware of who they are dealing with (witnessed by the CDS trading levels of the US brokers).

Change in the pricing references – importance of CDS versus cash bonds (which quickly became illiquid). Issuance windows have become very narrow. The uncertainty of the market (even on a day-by-day basis) has altered the execution process, with investor soft-sounding and intra-day execution now standard.

US and European markets have become disjointed. US markets have been far more resilient to the volatility until the last few months, when the European markets returned.