It is too early to call the end of the credit crunch but evidence that the crisis is not worsening, if not starting to ease, was in abundance last month. If March marked the lowest point in the financial crisis, the first half of April gave ample reasons to believe that sentiment is improving at least in the short term.
Mark Bamford, head of syndicate at Barclays Capital, explains that the tone has improved both in New York and in Londons primary markets. "Im not saying we are out of the woods but markets are now exhibiting a normal level of anxiety," says Bamford. "Now we are getting differences in opinion, instead of the universal negativity that was prevalent before."
Bamford says that two big issues have been hanging over the debt markets in recent months. First, there were questions about the capital adequacy of many banks and, second, widespread fears about liquidity. Action to alleviate these fears has started to have an impact on market confidence. The former via the sustained capital-raising by those banks that have announced big impairments, the latter by concerted and sustained central bank action.
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Washington Mutual, Wachovia, Lehman Brothers, HSBC and Royal Bank of Scotland have all raised capital, or revealed an intention to do so. And, in addition to previous concerted action to inject liquidity into money markets, the Bank of England has joined the European Central Bank and the Federal Reserve in offering liquidity (in the form of UK gilts) for highly rated bonds backed by mortgages.
European marketed deals include a US broker dealer, a three-year note for Morgan Stanley, but also a wide range of European institutions with and without investment banking franchises. UBS sold bonds in euros and sterling, and its domestic compatriot Credit Suisse issued in euros. There was a flurry of French banks deals using, primarily, two-year floating-rate notes and three-year fixed-rate bonds from Crédit Agricole, BNP Paribas, SG and Natixis. From Spain much maligned as an economy whose financial institutions are exposed to an over-egged mortgage market came Caja Madrid and Santander.
UK banks were largely conspicuous by their absence from the senior unsecured space, although they have printed (and retained) mortgage-backed and covered bonds.
Banks still hoarding cash Overnight swap rates vs three-month US and £ Libor/Euribor Source: DKrW
Lack of trust
Banks still hoarding cash
Overnight swap rates vs three-month US and £ Libor/Euribor
"In senior funding weve seen a modest stream of issuers, predominantly the larger double-A-rated banks. But youll have noticed an almost complete absence of single-A-rated banks," says Mark Hickey, head of financial institutions, debt capital markets at Royal Bank of Scotland.
According to Dealogic, issuance from single-A-rated banks, as a proportion of European targeted deals, fell from 19% in 2007 to just 9% this year. And of course the overall total is much lower down to just over $300 billion compared with $432 billion for the same period in 2007.
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It remains the case that investors still do not trust many financial institutions.
Investors are happier with names that are deemed too big to fail. The thinking is that domestic regulators would have to support these because they are so huge and because the effects of such large banks failing would be catastrophic on economies and financial infrastructure. The implicit fear is that smaller single-A rated banks might be allowed to go under.
Bamford suggests that it is understandable that double-A-rated financial institutions have been at the vanguard of the mini-renaissance of bank funding in Europe. He believes it is simply a matter of time before investor confidence returns sufficiently for lower-rated banks to obtain access to the capital markets.