Double, double, toil, and trouble; fire burn and default risk bubbles.
That’s the seasonal riff that Standard & Poor’s uses to open a new report on the future of the U.S. credit markets — or what it refers to as the “credit cauldron.” The ratings agency says that we should no longer question the coming of a downward credit spiral, but should instead only inquire as to depth. You can download the full report here: CreditComment.pdf
The report really doesn’t include any silver linings, particularly when it comes to macro trends like slowed GDP, housing price sags and increased issuance of low-grade bonds. So let me insert one for you:
S&P cites recent risk aversion, which raises the cost of capital and decreases its overall availability. But there are already signs that such aversion is being counteracted by privatre investors who remember that down markets produce the highest returns. For example, dozens of financial institutions have raised funds specifically designed to buy up “hung” leveraged loans (Lehman Brothers just closed one yesterday). Moreover, private equity firms are continuing to raise large funds as if the credit crunch (and upcoming cauldron) didn’t exist. Bain Capital, for example, set a $15 billion fund target — including a co-invest vehicle — early in the summer, and never waivered.
I’m not suggesting that S&P is wrong in its overall prediction of doom and gloom. Just that you can find some candy on even the darkest of nights…