Last month, the credit bulls, if not exactly bellowing, were certainly peeping out of their hiding places following the Federal Reserve’s 50 basis point interest rate cut, the Bank of England’s bail-out of Northern Rock and injections of three-month liquidity, better-than-expected earnings from the big US investment banks after modest write-downs of LBO loan commitments, and signs of easier conditions for issuers seeking to roll over commercial paper.
Spreads rallied in late September to the point where Citi’s credit analysts suggested "further tightening would take us precariously close to where spreads were in May".
Is the great credit scare over, then?
Moody’s analyst John Lonski points out that the non-financial corporate debt to pre-tax profits ratio, which rose to 5.8:1 in the second quarter of this year, looks decidedly healthy compared with 10.9:1 in the recession of 1990 and 8.4-times pre-tax profits at the end of 1998, and are positively robust next to the peak in the second quarter of 2002 of 17.4 times.
In addition, a falling Libor rate will curb corporates’ interest expenses, which hovered around 16.8% of profits in the second quarter, well under 1998’s 26.7% and 2000’s pre-recession 40.2%.
