What Corporate Issuers Should Know About Current Spread Markets

What’s Important Going Forward

April 14, 2020 – The global economy is facing two external shocks — a material shutdown due to COVID-19 and a price war by two major oil producers. While a lot of press attention regarding the effects of these shocks has focused on equity markets, there has also been a significant impact on asset prices and funding markets as higher risk premia are factored in.

For corporate finance professionals, it’s important to recognize a few facts about the current situation: uncertainty is very high and the outlook is quite bleak, but markets are functioning and capital intermediation is occurring fairly effectively. Moreover, policymakers — both the Federal government and the Federal Reserve — have been proactive, aggressive, and creative in addressing visible problems. All of this said, there is still a very large chasm of economic collapse to bridge, and this will not be easy or painless. However, it will also bring opportunities and various pockets of capital are already positioning for such.

What is implicit going forward is:

  1. Managing liquidity remains paramount, for both corporate issuers and portfolio managers.
  2. Dislocation in markets also brings opportunities for investors and issuers.
  3. Rating agencies are moving fast to downgrade, with increasingly multi-notch moves.
  4. Default risk will rise, likely quickly and by a lot.
  5. The Federal Reserve has expanded its Crisis Tool-Kit to include credit markets.
  6. Private equity has significant ‘dry powder’ which bears monitoring.

Unlike the crisis of 2008, policy makers acted aggressively and forcibly in reaction to today’s external shocks to maintain orderly markets, ensure credit intermediation, and coordinate fiscal stimulus. To further strengthen the response, the banking system is now working effectively in intermediating risk in size. Corporates should take advantage of opportunities to raise liquidity, as the pockets of capital will be less consistent and shorter duration than in the past. While ‘quality’ corporate borrowers can tactically raise funds into pockets of demand, defaults and distressed companies will be more prevalent, although this could also present opportunities to acquire assets at interesting valuations.