Creditflux Newsletter

How about this for irrational exuberance? Last month Google issued 10-year bonds with a 3.625% coupon, as part of its $3 billion debut issue.

Who in their right mind would buy this bond, even at the slight discount at which it was issued? You are lending 10-year money to a company that has barely been in existence that long. And you are getting paid 42 basis points less for your trouble than if you lent to Philip Morris, which also issued 10-year bonds last month.

Negative convexity doesn’t even come close to describing the profile of Google’s bonds. There is no conceivable upside, and a yawning chasm of downside.

It is true that Google is rated double A and has more cash than Roman Abramovich. It is also true that Google is the closest thing to a utility in the virtual world. But this is still the internet. Things online change fast.

People need internet search, but not in quite the same way that smokers need nicotine. Google could lose its dominant position in internet search – and most of its ad revenues – in the blink of an eye.

There has been a lot of talk of a second internet bubble forming. Up to now I have been doubtful about that. Even the IPO price for LinkedIn did not seem too aggressive given that the company has real and rapidly growing revenues, unlike most of the dotcoms that listed 12 years ago. It is not surprising that the stock doubled in price on its first day. (Fishknife does not dabble in social networking, but is told that LinkedIn provides a genuine service. Apparently, most of the credit traders in the market currently have their CVs listed there.)

But Google’s bond issue makes me wonder if perhaps we are approaching a new millennium moment. So, here is Fishknife’s run on the Google 10-year bond.

I’m a buyer at 80 any time during the life of the security. And there will surely come a time in the next 10 years when interest rates are at 7% and Google’s business is being destroyed by something that is currently just a crazy idea bouncing around the head of a spotty silicon valley programmer. And when that happens, you will hit my bid.

On a completely separate topic, I fully agree with my co-columnist Wolseley’s point that Europe is suffering from a dearth of loans. Politicians attack banks for refusing to lend. But the reality is that banks can’t find the assets to buy.

However, don’t expect this state of affairs to last. Despite the political rhetoric about encouraging lending, each big type of European loan buyer is under pressure to reduce its lending capacity.

First, funds in Europe are increasingly dominated by the Ucits label, and the European Commission – in its wisdom – chose not to allow Ucits funds to invest in loans. The result is a feeble institutional investor base for loans, especially compared to the growing US market.

Second, banks are under pressure to improve their capital ratios. They cannot easily do this while expanding lending.

Third, the European authorities have turned a deaf ear to the complaints of the CLO market, and imposed on these asset management vehicles the impossible burden of complying with risk-retention rules that were designed for balance sheet securitisations.

So that’s the three biggest types of credit investor all out of the game. Three years from now, when Europe’s CLOs have reached the end of their reinvestment periods and when banks are reeling from sovereign default losses, demand for European loans will be a fraction of what it is now. And Europe’s politicians will have no-one to blame but themselves.