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Capital Markets

Debt markets: Two tiers in 2009

Not all doom and gloom for 2009, though capacity will be tested.

The portents for the overall capacity of the debt market in 2009 appear bad, given that news of the economic outlook is unremittingly gloomy and there are serious problems in store from defaulting credits and ratings downgrades.

Bellwether indicators such as the Crossover and the iTraxx keep hitting historical wides (1120 and 206 in mid-December), pricing in record levels of defaults and low recoveries.

But despite the debt capital markets being shut for several weeks on both sides of the Atlantic after the traditional summer lull, not all issuance volumes fell off the edge of the cliff in 2008.

Corporate supply in euros was €151 billion in 2008, an increase of more than €10 billion on the previous year. Supra/sovereign/agency issuance also rose, by about €15 billion to €99 billion – despite most of that sector’s activity being in dollars. Although there was a big fall in financials, where new issues fell by €100 billion to €590 billion, HSBC’s head of European syndicate, Jean Marc Mercier, points out that supply of fixed-rate bonds from both corporates and financial institutions rose substantially – up by 44% and 12% respectively.

Floating-rate notes account for much of the decline in issuance, and those buyers were mostly leveraged, including bank treasuries.

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