The confidence of investors and bookrunners in the credit markets has deteriorated as banks around the globe question their capital adequacy and asset valuations.
ôWho will want to lend, what collateral will they want? ItÆs a scary situation out there,ö says an investor who is heavily invested in Asian investment-grade bonds. He says nobody knows what quality assets the investment banks are holding and how much capital they have, or indeed if they will survive in the coming weeks or succumb to the same fate as Lehman Brothers.
A debt capital markets banker says the turmoil is causing Asian corporates to question their debt plans. ôEven top-rated Asian companies will find it tough to raise debt under the current situation,ö he says.
A second DCM banker says some highly rated Korean companies are mulling putting their debt raising plans on the back burner, some because Lehman was mandated as a bookrunner.
Samurai bonds, which have been effectively utilised by highly rated international companies since the start of the year, have been affected too with a number of investors taking a wait-and-see attitude.
Earlier in the week, UK-based National Grid Gas postponed what would have been its first samurai, citing the tough market environment, according to Mitsubishi UFJ Securities. The London-based company had expected to sell Ñ10 billion ($94 million) of the securities in the Japanese market.
Samurai bond sales, or bonds sold by foreign companies in Japan, rose 61% this year to Ñ2.6 trillion as investors sought securities that pay a higher yield than notes issued by Japanese companies. Before it went bust, Lehman had Ñ195 billion ($1.8 billion) of samurai debt outstanding.
The market turmoil has come at a time, after the summer lull, when company treasurers are usually busy placing calls to bankers to arrange their next debt raising exercise. They also have to contend with fewer underwriters to call. First it was Bear Stearns that was gobbled up, then Lehman Brothers, the fourth largest securities house in the US, went belly-up.
Adding to the depressing mood are concerns in the market that at least one more investment bank is on the brink of losing its independence. This has sent the corporate bond default risk to a record in Asia as regional equity markets have dived and credit markets have virtually shut down.
Credit markets in the region are concerned that big financial companies may be unable to honour their debts. News reports from New York have suggested that Morgan Stanley management is seriously weighing a merger with Wachovia, while Edinburgh-based HBOS Plc has agreed to sell itself to Lloyds TSB Group for ú12.2 billion ($22.2 billion).
ôRight now everyone is in a frenzy. There is so much dust created that it will take weeks or even months for it to settle down and calm the markets,ö says the first investor.
He adds that in such murky conditions no Asian corporate will be able to raise debt, even with top ratings from rating agencies.
Meanwhile, Standard & Poor's says the direct exposures of rated banks in Asia ex-Japan to Lehman Brothers are not expected to be significant enough to materially damage their credit profiles.
"A few Taiwanese, Philippine and Chinese banks appear to have more direct exposure to Lehman Brothers entities," says Standard & Poor's credit analyst Ritesh Maheshwari. "However, Asian banks' strengthened balance sheets, as a result of healthy profits over the vibrant economic environment during the past half a decade, can withstand the impact of likely losses from direct exposure, without rating downgrades."
"We continue to believe that the risk to Asian banks is more from the impending economic slowdown and market turmoil than from direct exposure to the distressed US financial institutions," Maheshwari says.
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