Global risk undergoes a repricing, says S&P

Ratings agency, Standard & Poor's has said the global debt markets are in the midst of a jarring repricing of risk, with $500 billion of international leveraged loan pipeline being blocked.

"The correction has halted activity in certain segments of the (global) debt markets. Perhaps the biggest logjam is in the high-yield and leveraged loan segments.... Only a trickle of (the blocked) deals are currently closing," said S&P in a commentary on the current state of affairs in the global debt markets.

Several Indian companies are expected to be in the market to refinance bridge loans availed for their acquisitions overseas. These companies could also face hurdles in raising the much needed funds.

S&P said that although a correction was expected, complex financing structures and risk-transfer strategies in the financial sector are prolonging the repricing process and causing risks to propagate in unexpected ways this time around.

After a two-year binge of aggressive credit expansion and loosening underwriting standards, the credit markets abruptly changed direction about two months ago. Deepening worries about the US subprime mortgage and leveraged loan markets triggered a reversal in the US market sentiment, quickly spreading to Europe and parts of Asia.

S&P claimed that since 2005, many credit-market participants including itself, have pointed out the overheated global residential housing markets, the increasingly aggressive practices in the leveraged loan market and the excessively narrow risk premiums on corporate loans and bonds. Clearly, the current sizing-up of the credit markets is linked to the aggressive credit expansion that preceded it.

The sheer volume of activity leading up to the correction has amplified the shock of the reversal. "But we believe that a collective reassessment of credit risk premiums and less-aggressive practices in subprime mortgage lending and leveraged finance will lead to more rational pricing in credit markets. Lenders and investors will be more appropriately compensated for and better protected against credit risk on new businesses."

S&P said that uncertainty abounds, but the financial sector as a whole has sufficient fundamental strength to absorb the significant bank loan and securities markdowns, reduced earnings in investment banking and trading, and increased credit losses that are sure to emerge in the second half of 2007.