A large proportion of players in the debt market, including corporates, banks and hedge funds expect leverage ratios to increase next year, according to research findings announced today by Deloitte.

Tim Murphy, a debt advisory partner at Deloitte, commented: “A surprisingly large number of the organisations surveyed expect leverage ratios will increase or stay the same: 87% of banks, 80% of corporates and 83% of hedge funds. By contrast, 40% of private equity houses predict that leverage ratios will decrease, which may reflect their view that asset prices will start to level out next year.”

James Douglas, a debt advisory partner at Deloitte, added: “Figures are even more bullish in the corporate market where 90% of banks, corporates and hedge funds predict leverage will increase or stay the same. This reflects in part an anticipated increase in corporate leverage on the back of M&A activity and returns of capital to shareholders. 2007 looks set to be an exciting year for corporate M&A.

Douglas went on to say “The debt market continues to take a sanguine view of higher leverage levels and seems to be pricing for increased risk. An example of the market’s ability to absorb risk is reflected by comparing the recent Amaranth losses of some $6 billion compared with the shock waves created by the Barings collapse of around $1.5 billion ten years earlier. Risk is also being dissipated effectively through collateralised debt obligations (a portfolio of debt of varying ratings). However, these instruments may not be the panacea the lending industry believes them to be.”

David Stark, Director in Reorganisation Services at Deloitte added: “The owners of the CDO may not have visibility of the underlying asset and, moreover, may not know what part of the portfolio they own (particularly if they are trading debt regularly). The structure and ownership of the CDO can be very opaque: if there is a fall-out, how do you identify your assets? An additional worry for some is that CDOs are unregulated and normally run out of a separate offshore special purpose vehicles (or SPVs).”

Key findings on debt:

• 95% of banks, 72% of corporates, 83% of hedge funds and private equity houses predict that corporate credit quality will decrease or stay the same;
• 86% of banks, 93% of corporates, 83% of hedge funds and 91% of private equity houses predict that credit spreads will either increase or stay the same;
• 31% of banks and 33% of hedge funds expect covenant packages will become looser compared with 45% of corporates and 54% of private equity houses who predict that they will become tighter;
• The vast majority of banks and hedge funds expect the volume of debt in CDOs will increase while a slim majority of corporates and private equity agree.

Ends

Notes to Editors

About the research
Deloitte surveyed around 200 banks, hedge funds, private equity houses and corporates to assess confidence in the debt market.

About Deloitte
In this press release references to Deloitte are references to Deloitte & Touche LLP which is among the country’s leading professional services firms, providing audit, tax, consulting and corporate finance services. Deloitte & Touche LLP is the United Kingdom member firm of Deloitte Touche Tohmatsu (‘DTT’), a Swiss Verein whose member firms are separate and independent legal entities. Neither DTT nor any of its member firms has any liability for each other’s omissions. Services are provided by member firms or their subsidiaries and not by DTT. Deloitte & Touche LLP is authorised and regulated by the Financial Services Authority. The information contained in this press release is correct at the time of going to press.

Deloitte & Touche LLP is authorised and regulated by the Financial Services Authority.

The information contained in this press release is correct at the time of going to press.