Middle Market Firm-Led Underwriting Rises Through the First Half of Year; Credit Market Conditions, Stalled Liquidity Reduce Second Half Issuance Outlook

Aggregate middle market firm-managed underwriting in the municipal, federal agency, corporate, structured finance and equity market sectors surged to $249.2 billion in the first half of 2007, 27.0 percent above the $196.2 billion recorded during the first half of 2006. The year-over-year increase was led by securitization activity with first half volume more than 80 percent higher than in the same year-earlier period; agency debt with volume up nearly 50 percent; and municipal bond issuance, which increased nearly 25 percent. Middle market dealer-led equity underwriting share expressed as a percentage of total first half U.S. equity underwriting volume decreased to 42.9 percent from 54.3 percent during the same period a year ago.

Middle market firm-led underwriting growth was supported by favorable market conditions during the first half of the year. Beginning late in the second quarter and continuing into the third quarter liquidity conditions dissipated and the market repriced credit risk. Middle-market firms have been subject to the credit market-wide effect of subprime contagion that has caused credit spread widening and reduced liquidity.

Despite the weakening credit market conditions, as distinct from the subprime mortgage downturn, corporate credit fundamentals appeared to remain strong on sustained profitability and historically low default rates. Default rates, however, are anticipated to rise at a steady pace over the next year. The near-term credit market outlook suggests higher credit costs and constrained credit availability for corporate expansion and acquisition. While economic growth has been sustained through the early part of the third quarter, the weakened credit market conditions are affecting the growth outlook and increasing the probability of easier monetary policy over the balance of the year.

Equity issuance also continued its robust pace through the first half of the year, the result of strong earnings growth and shareholder-friendly financing strategies. Equity market price appreciation continued into the third quarter, with the Dow Jones Index surpassing 14,000 for the first time.

About the Report

The report analyzes and presents aggregate information and trends related to bond and equity underwriting in which one or more middle market securities firms “non-primary dealers” are the lead underwriter or “book runner” on the deal based on publicly available information. The report’s bond coverage focuses on long-term transactions – those in which the stated original maturity at issuance is greater than thirteen months – and covers the range of fixed-income market sectors, including municipal bonds, corporate bonds, federal agency securities and asset-backed and private-label mortgage-backed securities. In addition, the report analyzes and presents middle market firm mergers and acquisition (M&A) advisory activity.

Credits

SIFMA Research

• Senior Managing Director, Head of Research and Policy: Michael Decker
• Vice President, Director of Research: Steven Davidson, CFA
• Research Analyst: Bryan Gross