Keith Collister, Business Writer
Dr. Omar Davies' domain, the Ministry of Finance, National Heroes Circle, Kingston. - File
Leading international credit rating agency Standard and Poors (S&P) revised its outlook on United States Investment Bank Bear Stearns to negative from stable last Friday morning reflecting their concern about "recent developments and their potential to hurt its performance" and the damage "Bear Stearns has suffered from the widely publicised problems of its managed hedge funds".
At a hastily arranged conference call in response to S&P the same Friday, Bear Stearns finance chief Samuel Molinaro noted that credit market conditions were the worst in two decades.
U.S. stocks plummeted in response to these comments, with the Dow Jones Industrial Average ending the day down more than 2 per cent.
In a release James E. Cayne, chairman and chief executive officer of The Bear Stearns Companies Inc. noted "S&P's action highlights the concerns in the marketplace over the recent instability in the fixed income environment. He emphasised that, "Contrary to rumours in the marketplace, our franchise is profitable and healthy and our balance sheet is strong and liquid."
The Wall Street Journal announced yesterday that Bear Stearns co-president Warren Spector, formerly in charge of fixed income and the person most likely to succeed Cayne, was fired.
Recent Developments
According to leading international financial data provider Thomson Financial, the volume of high-yield or "junk" bond offerings (Jamaica is rated single B or junk by the international capital market) collapsed in July, when only $2.4 billion was issued. This is an almost 90 per cent decline from the $22.4 billion that was raised in June.
Marty Fridson, publisher of Leverage World, a research service that focuses on high-yield debt says "There's a big problem right now with unsold financing for leveraged buyout commitments that the brokerage firms have to work off and that is discouraging them from actively providing liquidity into the high-yield market". Market estimates are that there is between $150 billion and $200 billion in unplaced junk bonds now on the balance sheets of the major U.S. firms.
One international investment banker close to Jamaica described the markets for all sub investment grade borrowers as virtually shut down he expects them to reopen in September.
According to the New York Times, major financial institutions like Citigroup and JPMorgan Chase, which were among the biggest lenders to private equity firms, have enormous balance sheets to help them weather the storm. However, smaller investment banks are already becoming more careful about deploying capital elsewhere.
Even high-quality "investment grade" bonds issued by companies with sterling credit have not been immune, as according to Thomson Investment-grade bond issues fell to $30.4 billion in July - the lowest monthly total in five years - from $109 billion in June.
Bears problems common to industry
Bear Stearns responded that it was disappointed with S&P's decision to change its outlook on Bear Stearns as "most of the themes highlighted in its report are common to the industry".
However, Bear had already suffered a blow to its reputation from two collapsed hedge funds managed by Bear Stearns Asset Management (BSAM), whilst the market remains concerned about its continued access to cheap funds from its lenders.
In Bear Stearns view, S&P's specific concerns over hedge funds managed by BSAM "are unwarranted as these were isolated incidences and are by nomeans an indication of broader issues at Bear Stearns."
Effect on Jamaica
These events on Wall Street are important to Jamaica as Bear Stearns follows Jamaica the most closely of the major international banks, and has raised by far the most money for Jamaica on the international capital market.
Stocks and Securities new President of Fixed Income Clinton Brooks notes that Jamaican bonds, particularly the taxable bonds, have already been affected by the recent sell off of emerging market bonds, with the greatest impact on 2036s and the 2039s. In his view, this could be as a result of margin calls by Bear or reductions in their proprietary holding of these instruments.
However, he notes that Bears Stearns is not as dominant as they use to be in providing margin financing to Jamaican institutions, and the current disruption may provide a buying opportunity for locals to get bonds at discounted prices.
Mr. Brooks believes Bear's troubles should have no further impact on the local market as long as other institutions abroad are willing to offer margin. He notes, however, it is going to be more difficult to raise capital for Jamaica in the short to medium term, as Bear is one of the leading arrangers in the International Capital Markets for emerging market debt (especially Jamaica).
S&P has subsequently referred to Bear's liquidity as solid, and all other major rating agencies have affirmed their stable or positive outlook on Bear Stearns within the last six weeks.
