Assets are being priced for disaster following a complete collapse of the global credit market, Credit Suisse debt specialist Richard Quin said.
Collaterised debt obligations (CDOs) are being forced to de-gear in the wake of tightening credit conditions, but the yield spread has also caused the de-leveraging and repricing of asset classes, Quin told financial advisers in Sydney yesterday.
"What we're seeing right now is a de-leveraging of assets," Quin, Credit Suisse Asset Management's Australian fixed interest investment manager, said.
"We're seeing a lot of assets that are being priced for disaster not perfection. Last year assets were priced for perfection."
In Australia, the domino effect from the sub-prime collapse led to debt concerns with highly-leveraged stocks Centro Properties Group, MFS Limited, Allco and more recently ABC Learning. This spooked investors and led to massive downgrading of share prices.
Quin said while risk still remains general and is not yet company specific, strained liquidity would see most other banks join ANZ being caught up in the widening sub-prime crisis.
Short-term bank borrowing is the widest it has been since 1998 and bank capital spreads are wider than 2002 recessionary levels.
"This is a complete collapse of the [credit] market," Quin said.
Earlier this month ANZ revealed it put aside $361 million to pay off potential bad debts, the biggest of which was a $220 million derivatives position with United States monoline insurer ACA Capital.
CSAM head Keith Ince said investors need to adjust their thinking to lower rates of return.
The Future Fund's mandate to achieve an average return of five per cent above the Consumer Price Index per annum was a good example, Ince said.
"That's not a bad way of thinking. We don't know to what extent the problem is going to go away," Ince said.
