Any port in a storm: as 2007 ended, most of the signals in the lending and borrowing markets were on red alert. Cash is king, and troubled borrowers may have to turn to distressed-asset lenders to get any funding at all.

• Author: Marshall, Jeffrey
• Position: CREDIT MARKETS

You don't need to be a weatherman to know which way the winds have been blowing in the credit markets.

From a strong tailwind into the summer months, the winds have swung around sharply and turned into stiff headwinds that have shaken the markets from stem to stern. The ensuing credit crunch, led by the crisis in subprime mortgages, is taking a toll almost everywhere you look. Lenders have run for cover (and safety), corporate bond markets are getting higher risk premiums and companies with liquidity problems are having a hard time getting their phone calls returned.

As 2007 was in its final weeks, precious few signs emerged that the credit crunch may end any time soon. "It's not a gloom-and-doom scenario, but the worst of the subprime impact is still in front of us," says Cyrus Pardiwala, a partner with Pricewater-houseCoopers and leader of its U.S. Restructuring Advisory Services. "The full extent of potential losses in financial institutions is unknown, but I suspect it is larger than what most expect."

Even private equity deal-making, the biggest capital markets engine of 2007, is beginning to cough and sputter. Consider that Cerberus Capital Management, which took Chrysler Corp. private last year, found itself sued by United Rentals Inc. when Cerberus insisted on renegotiating the terms of the transaction and its deal for the equipment-rental company failed to close by mid-November.

Restructurings and recapitalizations are being done, but on considerably tougher terms. That means higher rates, longer terms and changes in collateral and covenants. The days of "covenant-lite" in the spring and early summer are just a memory; lenders are writing strict covenants and insisting that they will be enforced.

"Liquidity, specifically cash, is king right now," noted analysts at Lehman Brothers in a recent report. "If you do not have it, and need to access the capital markets, you are likely to have to pay dearly in the current environment."

Banks have been pulling in their horns. "Commercial bankers, generally speaking, are much more cautious; they also don't currently have portfolios with a lot of troubled credits," says PwC's Pardiwala. "Over the past few years, if a [loan] seemed risky, the banks could mitigate their risk by trading it away in the secondary markets. But spreads have clearly increased, and banks are now much more cautious of their ability to syndicate."

"When the economy and the financial markets are in distress, there is a lot more activity on the restructuring front," says Peter S. Goodman, a partner with law firm Andrews Kurth in New York. "We're at the beginning of what may be a period of significant restructurings." Currently, there are industries, like those related to the sub-prime mortgage mess, which banks in many cases are simply unwilling to lend to, he adds.

Consider the...