If this is what a true credit crunch is supposed to look like, then sign us up for more of the same. When catastrophe was expected to rule headlines, instead deal chatter has once again come to the fore of investors' minds. We've spilled much digital ink on the current market correction, the Fed's tactics, and credit fears in general. (See our archived August and July commentaries for more.)
It's getting tougher to argue global liquidity has run dry given recent news. For example: Rio Tinto successfully raised $40 billion for its takeover of Alcan. This represented the largest loan ever made to a United Kingdom company and the 4th largest ever worldwide. Rio executives said the debt offering was "comfortably subscribed to" and they would not have to pay any more than previously planned.
In fact, the last couple months haven't even been particularly bad for deal terminations. July featured a total of 39 terminated deals (including private and public), and August's total (around 18 deals terminated so far) is still below the average monthly number of 51 terminated deals per month going back to 1997.
Folks forget that today's M&A boom is fueled mostly by corporations buying each other, not private equity (though that gets all the press). Nothing has changed on that front—corporations are utilizing cash-rich balance sheets to fund deals in addition to debt. We've said time and again that today's merger activity isn't a function of risky speculation so much as it's the result of very attractive asset prices.
M&A Activity Shows Some Signs of Life, but Don't Expect Private Equity Revival
By Vance Cariaga, Investor's Business Daily
Other forms of lending remain at healthy levels too. Commercial paper (short-term corporate debt securities) sits at more than $2 trillion—higher today than at any point in history before May 2007. Commercial and industrial lending, meanwhile, continues to surge with 18% annualized growth in the most recent four-week period.
And what of those toxic subprime mortgage lenders? Even the biggest, stodgiest banks are seeing opportunities:
Bank of America Invests $2 Billion in Countrywide
By Staff, CNNMoney
We've noted in past commentaries that big banks—or any other financial entity—aren't in the business of "bailing" others out of a hole. They seek opportunity and higher profits. At today's discounted asset prices—there are plenty of bargains out there.
Some of the world's biggest banks borrowed half a billion each from the Fed's discount window this week, no doubt instigating naysayers to point to the event as a sign of dire liquidity straits. In reality, this borrowing was a very well-orchestrated gesture—a calculated response to the Fed's plea to banks last Friday to step up to the discount window. Each of the banks insinuated they didn't need the money, citing "the capacity to borrow money elsewhere on more favorable terms." If anything, this is a shining example of just how orderly and stable global capital markets are today…the banks took loans at a higher-than-market rate just as a show of good faith! (Besides, $500 million each is a drop in the bucket, barely enough to shift the balance sheets of these huge financial entities.) The Fed wanted big banks to borrow to help remove the stigma of discount window borrowing so smaller players would feel free to utilize it. In the past, discount window borrowing (although legal and available) was considered a sign of trouble.
All Together Now
By Liz Moyer, Forbes
All in all, things are downright stable in credit markets at the moment—nowhere near the catastrophe widely dreaded. As fear-laden hysteria disconnects further with reality, great opportunities abound in stocks. We just wish every credit "crisis" would be so benign.
Sources: Bloomberg, Trend Macrolytics