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Two Steps Forward, One Step Back
By: Dr. Charles Lieberman
Date: 1/26/2009
Progress is being made to unfreeze credit markets, although the process remains slow and uneven. Losses announced last week at Bank of America and Citigroup disrupted the otherwise steady gains. Even so, gains seem to be gathering momentum and new initiatives, notably the Obama Administration's impending fiscal stimulus package and new TARP plans, should be major contributors to unlocking markets. Even merger deals are resuming. This reinforces our sense that financial normalcy will be recovered, even if the process is likely to take some time.
Risk spreads seemed to be falling daily until the latest losses of Bank of America and Citi caused a hiccup. Libor rate spreads increased, but just by several basis points. At the end of the week, three intermediate maturity junk bond issues totaling just under $2 billion sold surprisingly easily. This is a dramatic contrast with the fourth quarter when high-yield issues were hardly sold at all. The recovery in corporate bond issues, now running $40 to $50 billion weekly for investment grade credits, is a very significant development in the march towards normalcy in the credit markets.
The Senate is expected to confirm Tim Geitner as Secretary of the Treasury Monday evening and he is expected to announce the Obama Administration's new TARP program initiatives within days, which will focus on improving the flow of credit to households and business. This implies large scale asset purchases by Treasury or the Fed and additional declines in risk spreads. So, observers will be able to monitor the success of the program by tracking those risk spreads. It is our judgment that they will continue to decline, if only because it is very clear that the purchases to achieve such an outcome are sure to be extremely large.
The apparently impending takeover of Wyeth by Pfizer is another significant development in the progress towards credit market normalcy. Most large M&A deals announced in 2008 failed, either because acquirers developed regrets in the rapidly deteriorating economy or because financing became vastly more costly or unobtainable. Dow Chemical's deal to acquire Rohm and Haas is set with bridge financing from a consortium of banks, but there is some concern over how that bridge deal will be refinanced. Talks are underway to arrange for a longer-term bridge deal that gives Dow plenty of time to obtain long-term financing. With two such large deals now in the works, getting these deals done would be another meaningful step towards normal and to restoring investor confidence in financial markets.
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