Credit crunch time

"There's panic on the streets of London, panic on the streets of Birmingham," sang The Smiths. While most would be loathe to accept Morrissey as a man of foresight and wisdom, the market is certainly starting to feel the tension around the current credit crunch. This hasn't yet escalated to panic, but the feeling is that the longer the uncertainty over who holds what debt and what this will mean continues, the greater the damage that could be done. The current issues around Northern Rock have done nothing to maintain calm, with images of customers queuing to withdraw their savings not making happy viewing. The market is still unsure of how far the rot goes and will remain so over the next few weeks, as people return from holiday and some attempt at a return to normal service is made. The volatility being seen at present was described to me by one banker as less of a credit crunch and more of a liquidity crunch. One thing has certainly become abruptly apparent in the past few weeks - the cheap readily-available debt that dealmakers had become used to has suddenly vanished. The latest comment from the Federation of Small Businesses suggests that those companies who are able to get loans now face paying interest rates in excess of 10%. Jones Lang LaSalle's Graham Dodd commented to me earlier this week, saying: "It's a bit like a phoney war at the moment, we haven't yet seen what the impact will be. The canny sellers are realising that it's a fact of life and are trying to get deals across now. Some investors have been using the situation to opportunistically chip pricing. "A lot of the economic fundamentals are no different to how they were three months ago. There is probably a fair amount of equity out there, but without debt there's no deal - without a doubt some lenders have shut up shop." So far the deals at the lower end of the market are still moving, but, as the price rises and, critically, the amount of debt required increases, the likelihood of deals stalling has grown. One agent I talked to described a total stagnation in any deals featuring significant levels of debt. For those with a bank amenable to balance sheet debt, or willing to pair with another bank to split the debt, deals are still possible - one banker I spoke to said his bank was looking at several transactions around the £100m level which were expected to be successful. That fees and the price of the available debt are rising is felt by some to merely be a return to a more sensible era which will force dealmakers to structure more sensibly instead of banking on the market to rise. For some companies, the effective neutralising of private equity will come as a relief after the feeding frenzy of late and will give them a chance to concentrate on running their businesses rather than defending them. However, while many commentators feel that so far this is a healthy correction to the increasingly inflated valuations seen over the last two or three years, the fear is that if it cannot be contained and seeps into the wider market, then the consequences will be more serious than a slowdown in transactions. For any company dealing with the US, the 'closed' sign is definitely up, with commentators suggesting that it could remain this way for a year or more, but there is some comfort to be had from the fact that the market has changed over the past decade or more to become more global. The position of the US as the country to drive the world's economy could well be bypassed as dealmakers look to the likes of the Middle East and Asia to fund future transactions. It is hoped that by looking overseas, the cure for the cold that Europe traditionally catches when America sneezes may have been found. Katherine Doggrell is editor of Hotel Report This month's Hotel Report, which is out this week, features additional coverage of the credit crunch and commentary from Tim Helliwell, Head of Hotel Finance, Hospitality & Leisure, Barclays