The real test for Barack Obama will begin only now as America grapples with the worst financial crisis in a century. It is like the familiar relative return versus average return game for Obama, feels Michael Carapiet, executive director and head of Macquarie Capital Group, the investment banking arm of Australian conglomerate, Macquarie Group. Macquarie Capital Advisers is the largest division in Macquarie Capital advising on more than $200 billion of transactions in the year ending March 31, 2008, with over 2,700 staff in 38 offices across 23 countries. They set up office in India in 2005 and have advised the Tatas and the Essar group on several transactions. In an interview with Priya Nadkarni and Palak Shah, Carapiet spoke about how the liquidity crunch is affecting firms and industries across sectors.
How do you see the situation on the liquidity front in the world markets?
It depends on the segments. Debt markets are progressively getting better. We see liquidity coming back into the system after a slew of regulatory announcements like rate cuts by central banks around the world. So the confidence of the debt markets is improving. Last week, we have seen equity markets in Europe and the US get a little better but across Asia it has been slightly patchy. But I don't know if anyone is saying that equity markets are bouncing back.
Indian corporates have borrowed heavily from overseas markets for various working capital needs. Do you see a problem for corporates in paying back?
Debt is hard to get now. Banks all around the world are rationing credit and it is now available only to some top rated corporates. However, everyone without doubt is paying more for their money. Corporates who have already raised money at the peak of the market are trying to push the maturity as much as they possibly can. If you have a refinancing due now or in the next few months -- most organisations in this position are asking their banks to extend the facilities. This is not a good time to be raising debt. Sensible organisations are looking to avoid refinancing during this period but again in some cases it is unavoidable.
What kind of deals can we see once markets pick up?
Whenever you come out of a cycle, the first flood of issues is always secondary and follow-on issues, then a few hybrid issues and IPOs. There is a whole backlog of deals waiting to come once markets are more benign. However, even though we have a rally now, it is too early to take a call.
What is the most sought-after instrument which corporates are relying on now?
The cheapest capital comes from debt. Equity is more expensive but it is still open. I would say that equity is more available than debt today.
When the Tatas and Birlas do large acquisitions, they were done in an environment of greater liquidity. However, there is some amount of flexibility in the structures that they have adopted. If you look at their plans, you will find that their cost has gone up. For the higher quality acquirers, there is some amount of debt though at a higher cost. Secondly, the relaxation of the government regulations with regard to external commercial borrowing (ECBs) will also help. Moreover, all the FCCBs that were done earlier and the money that was not utilised will start flowing back into India through the ECB route.
Which is a greater concern at present -- an uncertain business environment or difficult liquidity conditions?
Lack of liquidity causes the first one. If people knew they could raise finance on more reasonable terms, they would be more happy to do it. It is the hunkering-down approach. Companies are going back to their core businesses. They are suspending new initiatives. It is much more cost-focussed than revenue-focussed right now. The organisations which will take a more overt view have the opportunity to expand market share.
How do smart people make money in bad markets?
I don't think you can use the market as an excuse to not make money. Smart people make more money in good markets. If you have invested in good stocks and the share prices are down today for no reason, the fact that you have leveraged yourself means you have to sell a good stock. So that is a call that you have taken. If you are in cash now and buying debt, you will get 21 per cent return on your debt. So there are plenty of strategies.