A profit rebound at leading investment banks in the first quarter. Record hard currency debt issuance in the first and second quarters. Credit default swap spreads on major financials tightening by anything up to 300 basis points. In the first half of 2009, it was almost possible to forget that the credit crisis of 2008 had ever happened. Almost.
The bottleneck of debt issuance outstanding from 2008 was released in 2009 with remarkable force. Borrowers have adapted to the new market conditions, accepted that the cost of funds will not return to the rock-bottom lows that prevailed before 2008, and jumped back into the market with both feet. Total hard currency debt issuance worldwide was $2447bn in the first half of 2009, according to Dealogic data, compared with $1844bn in Q2 2008, and $2088bn in Q2 2007, when markets were still relatively open for business.
However, as the market recovers, there is already downward pressure on debt capital markets (DCM) team margins. Fees per dollar issued climbed in 2008, when it became more difficult to get deals away and the most troubled investment banks were retreating from the market to face their own restructuring challenges. With tougher competition and lower spreads returning, Dealogic estimates global DCM fees (including local currency deals) at $9.47bn in the first half of 2009, up just 2.8% year on year, whereas issuance volumes climbed almost 18% year on year for the same period.
Desperate measures
And there is also an air of desperation about the glut of issuance - companies that had been starved of funding for anything up to a year snatching a window of opportunity, for fear that it will snap shut later in 2009. The economic outlook is still uncertain, especially in those emerging markets that were hit relatively late by the onset of the crisis and have only started to enter recession in 2009. Equity capital market activity, much more dependent on economic growth prospects than its DCM counterpart, has noticeably not recovered to anything like the same extent.
And debt pricing could deteriorate again, as the wave of corporate defaults sparked by worldwide recession is beginning to bite. The corporate default rate rose into double figures on speculative-grade credits in mid-2009, and this will sap debt market confidence, as well as undermining bank balance sheets still recovering from the structured finance impairments of 2007-08. Historically, the thinly traded markets in the holiday month of August have a bad reputation for significant downward corrections, and DCM bankers already suspect they may look back on Q2 as the golden days.
