Editor's letter

When Credit last went to press, it was clear that the expected summer lull would be anything but quiet. Value had drained from two Bear Stearns hedge funds with heavy exposure to the US subprime mortgage market, and the rating agencies had responded to rising defaults in the sector with negative actions on hundreds of mortgage-backed securities.

By late July, the summer's main theme - illiquidity - was established when KKR announced that it had been unable to syndicate £7 billion of senior debt to finance the Alliance Boots acquisition, amid a tightening of credit discipline. The deal had been characterised as a major test of investor confidence, but much less remarkable corporate issues were by this time being pulled from the primary market.

As I write, the view that the markets are undergoing a crisis in confidence and liquidity, but not a generalised 'credit crunch', is widely held, and it is one that we share. But a repricing, no matter how overdue or necessary, will always be painful for some and bring with it a period of uncertainty as market participants wait for conditions to stabilise.

In this issue, we go behind the news to ask how we got to where we are. We speak to Joseph Mason, who with Josh Rozner anticipated the CDO market's vulnerability to subprime at the beginning of the year and predicts more trouble in store. We consider the credit rating agencies' responsibility for the volatility, and explore the role the US housing agencies could play in restoring confidence.

Where appropriate, we have asked the question "what's next?" - what will entice issuers and investors back to the market and how will the landscape change when the turmoil ends? As one syndicate official remarked to me this week, there is more fallout to come: "We're getting cleaner, but we're not clean yet. There are still a few dead bodies to float to the surface."

Matthew Attwood, Editor.