Thursday 13 November 2008
$4 trillion in corporate debt coming due
Here’s another big number for the global financial crisis: $4 trillion. That’s the bill that nonfinancial corporate borrowers face over the next two years as their debts come due for repayment or refinancing, according to data from Dealogic. Meeting that obligation has gotten harder, where it’s possible at all.
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$4 trillion in corporate debt coming due
breakingviews.com
12 November 2008
Here’s another big number for the global financial crisis: $4 trillion. That’s the bill that nonfinancial corporate borrowers face over the next two years as their debts come due for repayment or refinancing, according to data from Dealogic. Meeting that obligation has gotten harder, where it’s possible at all.
Companies that borrow direct from the banks, around 85 percent of the total in Europe, will find there are simply fewer loans to go round. As overextended banks shrink their balance sheets, the International Monetary Fund estimates that European and U.S. banks alone will cut $10 trillion of assets over the next five years.
Speculative borrowers like hedge funds and oligarchs get the cold shoulder first. But some ordinary, moderately leveraged companies also are finding the door closed, notably those in wobbly consumer-oriented sectors, or those who pushed too hard on terms in the past.
Where there is lending to be had, it will be more expensive. Some banks are calculating rates on new lending based on the price of the borrower’s credit default swaps, instruments that insure against the underlying company going bust. The trouble is, CDS prices are influenced not by companies themselves, but by the whims of the credit markets.
When banks say no, there’s always the bond market. But issuing bonds is expensive right now. Altria, the U.S. tobacco company whose brands include Marlboro, just issued a $6 billion bond at a punishing 600 basis points above the government bond rate. For smaller, less trusted players, the market is even tougher.
In theory, sky-high lending rates will attract new entrants to the market. Some Japanese banks are reportedly stepping in - but they won’t be able to absorb the full amount of debt coming due. So some businesses will fail. And others will need to take evasive action, like cutting staff, stopping dividends, shutting branches or slashing costs and capital expenditure.
Less credit for speculators looks like a healthy correction. It’s not so healthy if otherwise viable companies go to the wall. Keeping lines of credit open to corporate borrowers should be high on world leaders’ agendas when the Group of 20 countries meet in Washington this weekend. - John Foley
A RISKY DEAL FOR TAXPAYERS
So what is a bank, after all? The Federal Reserve is using an increasingly liberal standard to decide which U.S. businesses can obtain banking licenses and get access to government lending. Investment banks, savings and loans, and even the troubled auto lender GMAC have come knocking.
In the latest twist, the Fed says the credit card and travel giant American Express can call itself a bank. U.S. taxpayers may come to regret it.
The move looks to be a great deal for American Express. It has to put up with more oversight from the Fed. But in return, it gets access to the central bank’s pantheon of lending facilities, where AmEx can pony up securities backed by its credit card receivables as collateral for inexpensive loans. That is important, since the market for securitized credit card debt screeched to a halt in October, making it harder for credit card companies to fund their businesses.
The Fed also waived its usual 30-day waiting period, giving AmEx the option to apply for a capital injection from the Troubled Asset Relief Program before the Friday deadline.
For U.S. taxpayers, the Fed’s move looks risky. The central bank has already strayed outside its strict regulatory mandate with its $152 billion rescue of American International Group. Losses at the insurer’s huge finance business made that seem necessary, if poorly handled. The merits of extending government largesse to a credit card company, which poses no systemic risk and has been reporting steady deterioration in its credit portfolio for more than a year, are far less clear. The move may also embolden other types of financial institutions to seek the Fed’s shelter.
Granted, contraction of available consumer credit is squeezing the U.S. economy. So the Fed’s move may be worthwhile if it helps to keep AmEx lending. That’s not a sure thing - banks have sat on their bailout funds, or used them for acquisitions. If the Fed allows AmEx and others to do the same, while still exposing taxpayers to consumer credit, the danger posed by its mission creep will be clear. - Dwight Cass
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