Storm clouds ahead
March 12th, 2007 Alex JurshevskiToday’s question is this: Are we looking at a gathering credit storm of Katrina-like proportions or merely another peaceful sunset in this never-ending credit cycle?
Although the recent quarterly financial releases for the largest Canadian Banks show that in aggregate, gross impaired loans and provisions for credit losses have increased somewhat year over year, 2006 must nevertheless be regarded as the most successful year by most commercial standards for the leveraged debt markets. New issue volume is at record levels, defaults remain low by historical measures, and market liquidity continues to be strong, fed by sizable new sources, including cross-border flows.
The success of the current market is however accompanied by a potentially troubling pattern, while the supply of ‘B’ and ‘CCC’ rated new issue volume new all-time highs in traded leveraged credit markets. ($131 billion in 2006, up sharply up from $87 billion in 2005) credit spreads have remained flat or have declined. While the significance of this has yet to play out, it is worthwhile noting that in both the US and in Europe, banks have recorded significant increases in the size of their loan loss provisions.
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