Wall Street Haunted by ‘08 Loses Risk Appetite: Credit Markets

Aug. 29 (Bloomberg) -- Wall Street traders are demanding the biggest premiums to buy and sell credit in almost two years as they seek protections from market swings driven by Europe’s debt crisis and a slowing global economy.

A measure of the cost of trading credit-default swaps has tripled this month as prices gyrate the most in 13 months, according to data compiled by Bloomberg and CMA in London. Amid the volatility, the biggest bond dealers cut their holdings of corporate securities to $73.1 billion as of Aug. 17, the least since July 2009, Federal Reserve data show.

The surge underscores the fragility of credit markets three years after the collapse of Lehman Brothers Holdings Inc. triggered the biggest corporate bond losses in at least 35 years. With junk-rated securities poised to lose the most this month since November 2008, banks and investors are bracing for broader declines on concern Europe’s fiscal imbalances will infect the banking system at a time when the economy may not be strong enough to withstand such headwinds.

“The specter of 2008 still looms large,” said Tom Farina, a managing director at Deutsche Insurance Asset Management, which oversees $200 billion. “People understand that tail risk is still quite large in comparison to the way we used to think about it,” he said, referring to extreme market moves that fall outside probable outcomes forecast by Wall Street.

Bid-Ask Spread

The difference between where dealers will buy and sell the 15 most-traded credit-default swaps on U.S. investment-grade companies has widened to 14 basis points from 4.6 basis points at the start of August, according to market prices compiled by CMA. That’s equivalent to $14,000 on a $10 million contract and up from $4,600. The so-called bid-ask spread has increased to 5.4 percent of the annual cost of the contracts, the most since December 2009 and up from 3 percent on Aug. 1.

“The dealer community is not putting risk on,” said Jason Rosiak, the head of portfolio management at Newport Beach, California-based Pacific Asset Management, an affiliate of Pacific Life Insurance Co. “They’re not cushioning the blow as they once upon a time were, and this leads to more volatility.”

Equipment Finance Industry Confidence Declines in August

 Washington, DC, August 19, 2011 –- The Equipment Leasing & Finance Foundation (the Foundation) releases the August 2011 Monthly Confidence Index for the Equipment Finance Industry (MCI-EFI) today.  Designed to collect leadership data, the index reports a qualitative assessment of both the prevailing business conditions and expectations for the future as reported by key executives from the $521 billion equipment finance sector.  Overall, confidence in the equipment finance market is 50.0, down from the July index of 56.2, indicating apparent industry reaction to U.S. economic conditions and federal government fiscal management and policies.

When asked about the outlook for the future, survey respondent Russell Nelson, President, Farm Credit Leasing Services Corporation, said, “Pent-up demand for replacement assets and improving conditions in select industries may continue to drive strong results for the remainder of 2011.   The key to future business confidence rests with leadership in Washington, DC, and their ability to craft a budget that Wall Street, Main Street, and the global community view positively.”

August 2011 Survey Results:

The overall MCI-EFI is 50.0, a decrease from the July index of 56.2.

•  When asked to assess their business conditions over the next four months, 13.2% of executives responding said they believe business conditions will improve over the next four months, slightly decreased from 14.0% in July.  65.8% of respondents believe business conditions will remain the same over the next four months, a decrease from 81.4% in July.  21.1% of executives believe business conditions will worsen, a sharp increase from 4.7% in July. 
• 21.1% of survey respondents believe demand for leases and loans to fund capital expenditures (capex) will increase over the next four months, an increase from 14% in July.  57.9% believe demand will “remain the same” during the same four-month time period, a decrease from 74.4% the previous month.  21.1% believe demand will decline, up from 11.6% who believed so in July. 

• 21.1% of executives expect more access to capital to fund equipment acquisitions over the next four months, down from 23% in July.  73.7% of survey respondents indicate they expect the “same” access to capital to fund business, a decrease from 76.7% the previous month.  5.3% of survey respondents expect “less” access to capital, the first time in nine months any respondents said they expect “less” access to capital.
• When asked, 23.7% of the executives reported they expect to hire more employees over the next four months, down from 32.6% in July.  65.8% expect no change in headcount over the next four months, an increase from 58% last month, while 10.5% expect fewer employees, an increase from 9.6% in July.   

• 55.3% of the leadership evaluate the current U.S. economy as “fair,” down from 72% who did in July.  44.7% rate it as “poor,” up from 27.9% last month. 

• 5.3% of survey respondents believe that U.S. economic conditions will get “better” over the next six months, down from 9.3% in July.  63.2% of survey respondents indicate they believe the U.S. economy will “stay the same” over the next six months, down from 79% in July.  31.6% responded that they believe economic conditions in the U.S. will worsen over the next six months, up from 11.6% who believed so last month.   

• In August, 28.9% of respondents indicate they believe their company will increase spending on business development activities during the next six months, down from 44.2% in July.  68.4% believe there will be “no change” in business development spending, up from 55.8% last month, and 2.6% believe there will be a decrease in spending, up from no one who believed so last month.  

 August 2011 MCI Survey Comments from Industry Executive Leadership:

Depending on the market segment they represent, executives have differing points of view on the current and future outlook for the industry.

Bank, Middle Ticket

“Until such time that the federal government can remove the unpredictability related to taxes and fiscal policy the economy will continue to sputter as the business community will be very cautious with respect to additional investment. This scenario will not bode well for the equipment finance industry.”  Executive, Middle Ticket, Bank

Independent, Middle Ticket

“Growth is slower than expected but we are seeing some positive signs of larger capital expenditures.”  Aylin Cankardes, President, Rockwell Financial Group

 Bank, Small Ticket

“Recent actions in D.C. make our environment very uncertain.” Executive, Small Ticket, Bank

Why an MCI-EFI?

Confidence in the U.S. economy and the capital markets is a critical driver to the equipment finance industry. Throughout history, when confidence increases, consumers and businesses are more apt to acquire more consumer goods, equipment and durables, and invest at prevailing prices. When confidence decreases, spending and risk-taking tend to fall. Investors are said to be confident when the news about the future is good and stock prices are rising.

Who participates in the MCI-EFI?

The respondents are comprised of a wide cross section of industry executives, including large-ticket, middle-market and small-ticket banks, independents and captive equipment finance companies.  The MCI-EFI uses the same pool of 50 organization leaders to respond monthly to ensure the survey’s integrity.  Since the same organizations provide the data from month to month, the results constitute a consistent barometer of the industry's confidence.

How is the MCI-EFI designed?

The survey consists of seven questions and an area for comments, asking the respondents’ opinions about the following:

1. Current business conditions
2. Expected product demand over the next four months
3. Access to capital over the next four months
4. Future employment conditions
5. Evaluation of the current U.S. economy
6. U.S. economic conditions over the next six months
7. Business development spending expectations
8. Open-ended question for comment

IASB Pushes Back

Decision On Lease Accounting Rule Changes Likely Pushed Back Until 2012

Inundated with comments and complaints, international accounting rule makers have decided to resubmit proposed changes on how companies account for real estate and capital equipment leases for public comment, a move that will probably delay issuance of a new lease accounting standard until well into next year.

The International Accounting Standards Board (IASB) and the U.S.-based Financial Accounting Standards Board (FASB) have made extensive changes to the exposure draft, released in August 2010 with the stated goal of improving the financial reporting of lease contracts. The boards said the changes would result in a more consistent approach to lease accounting and would improve the quality of financial information available to investors.

However, a four-month public review period brought nearly 800 comments from dozens of organizations representing real estate, equipment leasing, and other business and financial interests in December. Many respondents complained that the rules as proposed would make the standard more complex and inconsistent, with commercial property groups criticizing the changes as a potential threat to the market recovery itself.

Mazuma Capital Funds Million Dollar Transaction for Biofuel Company

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