So we continue to hear about the credit crisis - and a lot fo that talk continues to center around the commercial paper market. When we hear problems about liquidity in the market, etc. the reference is often to this short term paper market - not the longer term loans and lines of credit that middle market companies rely on.
So what is commercial paper? And why is it important? Simply explain, its a short term loan used to finance operations. Although it can take several forms, it is a security instrument that matures in under 270 days and is exempt from SEC oversight. Large corporations and financial institutions are able to issue paper - in return for the promise of repayment and a yield - much more cheaply than they could access a line of credit from a bank.
At issue, now, is that that market has evaporated for all but the strongest companies, and liquidity at the far end of the yield curve is much more effect. This is highlighted by the current run on the Fed's "borrowing window," which as of Friday (October 4) had loaned $348b to banks. With the commercial market frozen, they are forced to tap the Fed lending window to access short term liquidity.
And here is the trickle down effect: on the corporate side, triple A rate companies such as General Electric are able to still sell, but others are having bigger problems. Those that cannot go to banks. According to Bloomberg, "Lenders are balking at offering cash for longer than a day even as central banks pump an unprecedented amount of money into the banking system." Companies then, in turn, must tap more expensive lines of credit.
And thus the trickle-down effect: with large corporations facing increased financing expenses and a working capital crunch, smaller companies can expect:
Less favorable AR / AP terms
Increased financing expenses
More difficulty / scrutiny accessing lines of credit, etc
Credit Crisis Explained: Part 1
Of course the credit crisis is complex - especially if CDO's, CLO's, credit default swaps, and mortgage backed securities are not part of your every day conversation. That in mind, we thought we'd add this as a back ground primer- Marketplace does a good job at explaining one of the conerstone issues of the crisis - mortgage securitization and CDO's.
The Rise of the Boutique I-Bank
Information Arbitrage (a great read by the way) had a post regarding the future of Investment Banks. The whole post is worth a read, but a tidbit that we certainly agree with:
Investment Banking 2.0 will be the re-emergence of the boutique, the focused, nimble, high-touch firm that was the bedrock of capital formation in the early years of the stock market boom. Because these mega-firms being created at the urging of the Treasury are not sustainable.
This couldn't be more true for mid-market companies. The bulge bracket banks have been focused on returns trading complex products on their own account. And while M&A is always a fee multiplier in a bulge bracket bank, more recently other products have taken center stage.
As a middle market company, your needs are different. You need a "high touch" firm that can offer expertise when you need it - namely when you need to recap, or are working through an acquisition. The boutique is just what the doctor ordered.
The Buyout Industry and All That Debt: What it Means
There is a great article in today's New York Times discussing the titans of the buyout world and the current circumstances that they find themselves in. Whereas most of the brouhaha over the past quarter has centered around either the sub-prime fiasco or the inability to place debt for PEG's "mega deals," this article discusses the current state of the deals that got done.
M&A Market News
As dealmakers predicted, 2007 finishes on a strong note for M&A, with the middle market keeping up the pace of transactions. More.