Credit crunch

Synchronised drowning
By Christopher Hughes

Credit crunch: More than 18 months into the financial crisis, some observers are saying that things just might have stopped getting worse. But even cautious optimism is hard to square with what companies are saying and doing.

True, some recent business surveys – in the US, eurozone, UK and China – showed sentiment rising, albeit from dismal levels. The Baltic Dry Index of shipping rates has doubled although it is still down 90% from its peak last May. Goldman Sachs said its Global Leading Indicator (GLI) suggests “a trough in the global industrial cycle may be in sight”.

But the credit crisis continues to advance with tragic predictability. Ferretti, the Italian yacht maker which epitomised the easy wealth and casual leverage of the credit boom, has skipped an interest payment on its acquisition debt, according to Bloomberg. Hammerson, a UK commercial property developer, announced a rights issue on Monday. And Germany's Schaeffler is battling against a break-up after loading up on debt to gain control of Continental, another heavily indebted German car parts maker.

This is a global crisis. India’s largest discount retailer, Subhiksha Trading Services, suffered widespread vandalism this weekend after running out of cash to pay security staff. The company reportedly admitted to having “mucked up on not raising equity”. In the Far East, suffering is the order of the day. Japanese carmaker Nissan forecasts big losses and Korean electronics producer LG warns revenues, expressed in dollars, will be down 20% this year.

Of course, bad news will keep flowing freely until well after the recession’s trough is crossed. So perhaps the worst is indeed almost upon us. But a more plausible interpretation of the less bad surveys is that the rate of decline has slowed. After the failure of Lehman Brothers last September, credit markets were frozen and modest GDP growth turned suddenly into rapid shrinkage. The shrinkage may now be proceeding at a more moderate pace.

But whether the times are pitch black or only very stormy, there are always opportunities to make money, if only from companies under pressure. Private equity firms specialising in secondary buyouts see rich pickings in the portfolios of capital-constrained banks that are looking to sell what assets they can. And Frank Quattrone, the former Credit Suisse banker who became synonymous with the excesses of the technology boom, is expanding his boutique advisory firm into London. He expects a spurt in tech mergers. As they say, there is always a bubble inflating somewhere.

chris.hughes@breakingviews.com

http://www.breakingviews.com/2009/02/09/credit%20crunch.aspx?sg=telegraph2