On the surface, market volume numbers donÆt look too bad. Over the full year 2007 syndicated lending reached record levels of $117.2 billion, up 67% on 2006; equity capital markets (ECM) volumes rose 13% to $43.5 billion and total M&A activity rose 30% to $130 billion. But debt capital markets (DCM) activity was seriously impacted with volumes plummeting 20% to $100 billion on the back of disastrous activity levels for the fourth quarter, which at $15.1 billion was the lowest fourth quarter volume since 2002.
Most market participants predict DCM activity for both secured and unsecured bonds will remain slow, while in the opening weeks of 2008, equity markets û after a discordant second half of 2007 during which the ASX200 hit a record high of 6,784 points in October û dropped drastically. In the first two weeks of trading, the index plummeted 10%.
Growth and outlook
While acknowledging the challenges ahead as liquidity changes continue to impact market dynamics, The Commonwealth Bank of Australia leadership team is quick to emphasise the slew of opportunities made available now that the market has been shocked out of its holding pattern of ever-cheapening access to funds, particularly via debt markets. Comments Richard Green, general manager of client relationship management: ôEveryone takes stock of their position and tries to determine the appropriate risk-reward relationship in a time of economic concern. But times like these create opportunities for clients to expand and reorganise in new ways.ö
ôBeing relevant in a time of crisis underpins relationships. Right now clientsÆ key priorities are access to liquidity and certainty of funding,ö comments Ian Saines, executive general manager for institutional banking and markets.
In spite of the challenges facing global markets, the team believes there are solid growth opportunities both at home and abroad, particularly as new forms of capital, such as sovereign wealth funds, begin to assert greater influence on global markets. With the volatility global markets have exhibited over the past nine months, James Rickward, general manager for industry solutions and international, stresses that risk management will be an area of continuing importance.
ôGiven the volatility in currencies and interest rates, corporates are focused on their hedging strategies. This will continue to be an area of growth across currencies, interest rates and commodities,ö he says.
David Hancock, general manager for institutional equities and debt capital markets, believes capital markets will have a mixed year. Although DCM û particularly securitisation û will be challenging, he has high expectations of maintaining momentum in the unsecured business and moving into a strong market share position in prime residential and commercial mortgage-backed securities (RMBS and CMBS).
ôDeals will be smaller and more domestically focused, but we are already seeing the market come back for high quality issues,ö he comments. Although the Kangaroo business is expected to dip with the short term disappearance of jumbo US financial issuers, he expects to see more business flowing in the opposite direction, with more Aussie corporates seeking funds in the US144a and US traditional private placement (USPP) markets. Commonwealth Bank of Australia is deploying specific resources dedicated to growing the nascent USPP business.
Leanne Leong, general manager for structured finance, whose business objective is to support the equity and debt sides of the business in creating innovative cross-border structures, is anticipating a new influx of clients looking for balance sheet enhancement and cheaper cost of funds.
ôWe are seeing an increased interest from clients who previously thought structured deals were too difficult,ö she comments. LeongÆs team tailors transactions to specific client needs, leveraging the accounting, taxation, and regulatory requirements of each client. ôWe can add value in this environment as more clients are looking for offshore acquisition and expansion and we can facilitate their fund raising more efficiently,ö she says.
Nick Fletcher, general manager for structured asset finance, says 2008 represents an interesting outlook. ôWe have been successful in building our product teams offshore, particularly in Europe, and we now have increasingly good coverage in our chosen sectors, which should deliver growth,ö he comments. He believes the recent market events will be good for business and says the structured asset finance business has an excellent opportunity to take its home-grown skills and experiences into selective offshore markets. ôBy following our infrastructure and utilities colleagues offshore into Europe and Asia we are targeting asset growth in the major transportation asset classes of aircraft, rail and shipping,ö he comments.
For Fletcher a key challenge will be staying focused when so much opportunity for growth is available. The other key challenge, he says, is to secure the personnel to deliver the strategy. ôWhile we have done this well in Europe we are just embarking on the recruitment trail in Asia,ö he comments. Hancock adds that in Asia the capital markets team has a key push on convertibles, with keen interest from Asian hedge funds in this product group, and a focus on distributing Aussie loans to the Asian investor base.
Hancock believes the emergence of reverse enquiry-driven deals will continue to drive volume in DCM. ôDistribution is paramount in this context. We have fielded a huge amount of reverse enquiry for smaller issues û corporates are very interested,ö he says. And he has seen the same phenomenon take hold in ECM.
ôGlobally the recapitalisation of the big financials has been reverse-enquiry based and driven by sovereign wealth funds. We will continue to see institutions take placements that are very selective,ö he comments.
The syndicated lending business is experiencing unprecedented activity as corporates focus on debt maturity profiles and bring forward their refinancing plans.
ôWe are seeing a lot of emphasis on structure and security,ö says George Confos, general manager for institutional loan markets, who expects the attention on the domestic syndicated loan market will lead to a robust 2008. ôBanks that can lend in volume are much more relevant now,ö he comments. ôClients naturally have a heightened focus on minimising execution risk.ö
This story is an edited version of a profile that first appeared in the February issue of FinanceAsia magazine.