Login or Register

Featured Blogger

The Chinese Economy is On a Slowing Boat
James Finnan

Red-Hot Thread

"The corporate brand is not only used to improve competitive positioning and express company aspirations, it can also be a powerful tool to motivate employees."
Credit markets only half open to corporate borrowers Print E-mail
Thursday, 30 July 2009

By Marine Cole

After two years of little activity in the credit markets, the tide is changing for most corporations, which can again afford to borrow money. But only companies that can tap the bond market will be able to raise funds. If your company typically relies solely on banks for loans, you will have to wait longer as banks continue to curb lending. 

“The banks are just holding back because they're restoring their balance sheets and they're still in a deleveraging mode,” said Martin Fridson, chief executive officer of Fridson Investment Advisors, told CFOZone. “There's the advocacy of getting more credit out there, but we're still getting through problems at banks.”

The total amount of loans held by 15 large U.S. banks shrank by 2.8% in the second quarter and more than half of the loan volume in April and May came from refinancing mortgages and renewing credit to businesses, not new loans, according to a recent analysis by The Wall Street Journal.

It's a different story in the corporate bond market: In the first six months of the year, investment-grade corporations-rated BBB- and above--have borrowed about $525 billion, compared with $722 billion in all of last year, according to Standard & Poor's data. While junk-rated companies have only recently returned recently to the bond market, they borrowed about $50 billion in the first half of the year, up from $40 billion in all of 2008.

Meanwhile, the cost of debt for these and higher-rated companies has come down. Investment-grade bond spreads have narrowed to 240 basis points at the end of July from 480 basis points at the beginning of the year, according to Barclays Capital data. High-yield bond spreads have narrowed to around 960 basis points at the end of July from 1,560 basis points at the beginning of the year, according to Barclays. Credit above 1,000 basis points is considered distressed.

“There's been huge inflows into high-yield bond mutual funds,” Fridson noted. “Portfolio managers can't build huge cash balances and they're not constrained by the same problems as banks.” So they have been looking to invest in both existing and new corporate bonds. Better-than-expected earnings for the second quarter have also fueled interest. 

This divergence between bank loans and the bond market is sending mixed signals about the economy. On one hand, the rebound of the bonds indicates that a recovery is near or may have even already began. But banks still denying loans indicates that there may be more losses to be recognized in the banking sector and that the recession isn't over yet.

How long will it be until banks catch up and make credit available again? “From the looks of it, it's got a ways to go,” Fridson said. “It may require more equity issuance [from banks]. They haven't really bitten the bullet on that. They haven't been forced to take the write offs and move on.”

Comments (1)Add Comment
Marine Cole
written by Marine Cole, August 03, 2009
A quick follow up from a Moody's note on Aug. 3, which said that issuance of investment-grade corporate bonds may slow down:

"Many companies took advantage of the opening in the capital markets in the first half of this year; refinancing upcoming maturities along with opportunistic financing occurred at a rapid pace," it noted.

"Now, until debt financed acquisitions or capital expenditures grow significantly, issuance may slow. Most companies are tending to be cost-conscious, which may bode well for spreads should demand exceed growth in bond supply."

Write comment
You must be logged in to post a comment. Please register if you do not have an account yet.

Copyright © 2009-2013 CFOZone. All rights reserved. CFOZone is a property of PSN, Inc.