Friday, May 15, 2009

The Thirst For Risk

The charts below demonstrate unmistakably just how phenomenally bipolar the market has become, and just how aggressively asset managers are chasing after risky assets in order to make up for 2008 losses. Alas, nobody has learned any lessons from the credit bubble where fast, slow, dumb and smart money was all chasing the riskiest assets, all of which ended in tears for far too many people. The result so far for 2009: exactly the same pattern is repeating itself.

The highest activity, both in number of transactions and in notional, is in the riskiest space: equities. This makes intuitive sense: as Obama himself said on March 7th "the market has bottomed", with everyone rushed to jump into risk, and the subsequent explosion in new equity issuance is the result.

Not surprisingly, following the biggest short squeeze in decades, Real Estate equity issuance for the first 5 months of 2009 has already surpassed all of 2008, both in proceeds and in deal #. Only one thing can be said here. Once the downgrades begin of all recently upgraded companies being, all that new money will be very, very unhappy.

The most active sector just below equities are bonds, where activity has picked up over the last couple of months in the HY space, after a ramp up early in the year in the IG and the TLGP space.

What is interesting, is that loan deals continue to suffer - a space traditionally delegated for the least risky 1st lien deals, and hedge-fund focused 2nd lien deals, has seen a massive drought in demand for both, as asset managers prefer to jump straight into the riskiest assets hoping for a continuing game of greater fool with the administration's daily blessings.

Notable is also the collapse in M&A deal volume. The facts that companies are unwilling to spend either cash or stock currency in order to grow, should be very indicative to primary equity investors who, despite this graph demonstrating that no companies are even considering expanding in this environment, keep on purchasing follow on offerings in the crappiest of sectors for totally unfathomable reasons.

And lastly, more for comic value, than anything, I present the structured finance deals in the last year. Maybe the administration should have looked at this chart before rushing headlong into its TALF initiative.

All in all - based on this data, the appetite for risk seems to be ebbing. If you are one of the lucky (REITs) companies that managed to pull off a follow-on equity offering, congratulations. You just bought yourself 2-3 quarters of time before you still need to face the inevitable. For all the others - we recommend you keep your eyes on trucking company YRC Worldwide, which has thrown a wildly errant Hail Mary pass, and hopes to become eligible for TARP. Good luck to them, and good luck to all the other over-levered, CRE exposed, cash flow declining (and negative), undermanaged, overstaffed businesses caught in an economy which keeps on losing around 600k jobs every single month.

Deal data from Thomson One Banker Sphere: Related Content
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