The settlement market first felt the impact of the credit crunch last fall, as providers purchasing off lines of credit found themselves at the mercy of committees that suddenly, and for the first time, needed to intimately understand the transactions for which they were approving funds.
Predictably, closings slowed while buyers thoroughly scrutinized each presumed acquisition during the final funding and escrow reviews. This due diligence stall eventually eased and closing times improved in the months that followed.
Still, the credit fears remain and continue to impact the funding side, albeit earlier in the process. As is the case with many transactions, funding institutions have become very conservative in their lending practices and are not only reticent to extend credit, but are concurrently increasing collateral requirements on outstanding commitments.
In early March, the Federal Reserve attempted to stimulate the markets and improve liquidity by introducing the latest in a series of rate cuts dating back to mid-September. But investors and lenders remained skittish, prompting the central bank to take unprecedented action on March 12 by offering to lend $200 billion in Treasury securities to the largest investment banks. Stocks responded with their biggest one-day rally in 5 years, yet later that week the markets were pummeled again as plans to alleviate liquidity problems at Bear Stearns left many wondering exactly how much additional bad news was to follow.
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What does this mean for the settlement market?
The investment banks are exhibiting unprecedented selectivity regarding what they will add to their portfolios. We believe this is evidenced by the fact that several normally prolific buyers appear to be sitting on the sidelines, while other, previously less active buyers are winning auctions.
Some observers say this hyper-selectivity may be indicative of a change in the relationship between providers and funding entities. Traditionally, a buyer would establish criteria and arrange access to funding and the provider would continually fill the tranche within the established parameters. Under this arrangement, the providers were able to build a margin into the offer which would allow room to honor a commitment for relationship reasons, even if the yield expectations had moved against the buyer. Today, there is less room in the offer for pricing concessions, and there is no incentive to book potentially unprofitable trades.
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