Wednesday October 31, 2007 - 15:16:55 GMT
Share This Story
Lloyds TSB Financial Markets - www.lloydstsb.com/corporatemarkets
Credit Market Analysis - UK corporate outlook: only limited impact from the credit crisis
Credit Market Analysis 31 October 2007
UK corporate outlook: only limited impact from the credit crisis
Corporate borrowing costs have risen...
There seems to be a consensus that the outlook for the UK corporate sector has deteriorated in the last three months since the US subprime-related credit crisis started, but has it? The crisis has resulted in higher interbank rates (libor), leading to higher short-term corporate borrowing costs, even though the Bank of England has kept interest rates on hold since July, as chart a shows. This is backed up by the Q3 BoE credit conditions survey, which shows that lenders are tightening corporate credit availability, see chart b. In addition to bank lending, corporate bond spreads have also widened relative to benchmark, suggesting that the cost of raising finance through the credit markets has also risen. The spread of sterling investment-grade corporate bonds over government bond yields rose from around 80bps before the recent credit crisis to a peak of 152bps in mid- September. The spread has since fallen to 135bps, see chart c, but remains above pre-crisis levels.
...but will fall next year, as the BoE cuts interest rates
In fact, we believe that the UK economy was already set to slow in 2008, even before the recent credit crisis, as a result of the five quarter-point interest rate rises by the BoE between August 2006 and July 2007. For this reason, we never thought that UK interest rates would rise to 6%, in contrast to some forecasts of 6% or even higher during the summer. With weaker growth next year, we expect interest rates to be cut by 0.5% in the first half of 2008. We therefore expect 3-month libor to fall back to around 5.25% by the end of 2008 and this will be reflected in lower short-term corporate borrowing rates. We also expect the 5- year swap rate to remain around the current level of about 5.5%, having fallen from a peak of 6.3% in early July, as table 2 shows. Furthermore, stock markets have recovered since August, suggesting lower equity finance costs, see chart d.
Company liquidity remains abundant and surveys suggest no major fallout from credit crisis
Moreover, official figures show that company liquidity remains ample, which will cushion the impact of the recent credit crisis and limit the degree of slowdown in investment spending growth next year, see chart e. Indeed, the latest CBI industrial trends survey shows that the most important factors limiting capital expenditure in the next 12 months are uncertainty about demand and inadequate returns. This is in line with our view that weakening growth will hit corporates more than the subprime fallout. As chart f shows, only a small proportion of companies cited a shortage of internal finance, the inability to raise external finance or the cost of finance as factors constraining capital expenditure.
Hann-Ju Ho, Senior Economist
Economic Research,10 Gresham Street,
Lloyds TSB Corporate
London EC2V 7AE,
0207 626 - 1500
Any documentation, reports, correspondence or other material or information in whatever form be it electronic, textual or otherwise is based on sources believed to be reliable, however neither the Bank nor its directors, officers or employees warrant accuracy, completeness or otherwise, or accept responsibility for any error, omission or other inaccuracy, or for any consequences arising from any reliance upon such information. The facts and data contained are not, and should under no circumstances be treated as an offer or solicitation to offer, to buy or sell any product, nor are they intended to be a substitute for commercial judgement or professional or legal advice, and you should not act in reliance upon any of the facts and data contained, without first obtaining professional advice relevant to your circumstances. Expressions of opinion may be subject to change without notice. Although warrants and/or derivative instruments can be utilised for the management of investment risk, some of these products are unsuitable for many investors. The facts and data contained are therefore not intended for the use of private customers (as defined by the FSA Handbook) of Lloyds TSB Bank plc. Lloyds TSB Bank plc is authorised and regulated by the Financial Services Authority and is a signatory to the Banking Codes, and represents only the Scottish Widows and Lloyds TSB Marketing Group for life assurance, pension and investment business.
Forex Trading News
Daily Forex Market News
Forex news reports can be found on the forex research
headlines page below. Here you will find real-time forex market news reports
provided by respected contributors of currency trading information. Daily forex
market news, weekly forex research and monthly forex news features can be found
Real-time forex market news reports and features providing
other currency trading information can be accessed by clicking on any of the
headlines below. At the top of the forex blog page you will find the latest
forex trading information. Scroll down the page if you are looking for less
recent currency trading information. Scroll to the bottom of fx blog headlines
and click on the link for past reports on forex. Currency world news reports
from previous years can be found on the left sidebar under "FX Archives."