A World Awash in Bonds
The junk bond issuance coming to market over the next few weeks is shaping up to be the next big story for the markets. Debt, the lifeblood of the mergers and acquisitions world, is suddenly more difficult to issue.
Christian Oberbeck, Managing Director at private equity firm Saratoga Partners, joins Squawk Box at 6:20 a.m. EST to tell CNBC's Joe Kernen we may have passed an inflection point.
Oberbeck says the situation with Bear Stearns - its decision to bail out one of its ailing hedge funds, the decision by Merrill Lynch and other creditors to seize assets from Bear's funds, and the public controversy surrounding these circumstances - shows us something is definitely wrong with the market's current assessment of risk. Instead of the big investment banks resolving these problems on their own, we saw a very public breakdown in the system, widely covered by the media.
Because credit has been so easy to access, we've seen a large number of deals announced this year. However, the private equity veteran points out there is an important difference between an announced deal and a funded deal. He says many of the deals we've seen close over the past few months will now be going to the market for funding. According to Oberbeck, we'll see approximately $35 billion in bonds (and $14 billion in equity issuance) hit the market in the next three weeks alone.
Recent pushback from investors suggests the possibility of a cool reception for these new issues and a widening of credit spreads.
So, the big question becomes: are we at the top of a credit cycle, about to slide downward, or does the market just have to adjust to a new environment? Oberbeck says we could be looking at a scenario analogous to that of a snake digesting a rabbit: it's not pretty and it may take awhile, but it's all right in the end. Perhaps the credit market will be in reasonable shape again a few months from now.
Something else Oberbeck has his eye on is the fact that a number of investment banks have already extended loans to fund these deals before they go to the market for cash. He says we could see banks get stuck with loans on their books for longer than expected. This could hurt the banks' financial performance or simply decrease their appetite for underwriting deals.
The bottom line: Oberbeck says all market participants have to reassess their risk profiles right now. The balance of power has shifted from the issuer to the investor and "a world that had been awash in liquidity will now be awash in paper."