Debt: a year of two halves

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History will remember 2007 as a year characterised by two polar halves, with the first six months reflecting buoyant European credit and equity markets fuelled by unprecedented private equity activity.

But, while bankers celebrated on holiday, the global tide turned leaving many high and dry in the second half of the year (see graph). The impact of investing in US sub-prime mortgage-backed assets, including the exotic products such as 'ninja' loans (no income, no jobs or assets) resulted in significant write downs. The resultant haemorrhaging of confidence and liquidity in the credit markets led to them closing for business in August with banks failing to syndicate the EUR75-8bn of LBO debt even at discounted levels.

Margin spreads on leveraged loans have widened as investors began demanding compensation for their risk with pricing reverting to 2004/05 levels. In recent months, little movement has been seen in the mega deals although mid-market transactions financed by club debt packages have progressed. Underwriting banks continue to hold a large volume of debt which they cannot syndicate to other potential participant banks and funds. (Page 10).

Daniel Morland is managing director of Close Brothers Corporate Finance.