The credit squeeze is hitting not only the banks, but their corporate clients too, as Mitchells & Butlers has discovered. The pubs group has shelved plans to sell part of its estate to a joint venture with Robert Tchenguiz and return £1 billion or more of the proceeds to shareholders. The reason is the sudden souring of investor appetite for leveraged debt.

The difference between this deal and others is that it is the client, and not its banks, that has been left nursing wounds. M&B’s two lead banks, Royal Bank of Scotland and Citigroup, walk away unscathed. Despite 2½ months of negotiations, they had not committed themselves. By contrast M&B made the mistake of anticipating a deal by hedging against a particular risk. It is lumbered with a huge swaps hedge, valued in the books at minus £60 million.

The seemingly sagacious decision by Tim Clarke, M&B’s chief executive, to insure against a rise in real interest rates has led to a nasty theoretical loss, which remains open-ended. A change in interest-rate expectations could close the gap. Equally, markets could turn further against him. The M&B setback illustrates how delicately balanced some leveraged transactions are. The blended average interest rate on the various tranches of debt that the joint venture planned to issue had worsened by only about half a point. But that was enough to scupper the transaction. The higher rate reduced the quantum of debt that the joint venture could shoulder. Less debt and more equity meant a lower prospective return on equity.

At Barclays Capital, Bob Diamond is sanguine that the debt indigestion will be short-lived. The BarCap chief reckons that three months should be enough to get investor appetites warmed up again. For many deals that is true. But risk is being more realistically priced. The sums will no longer stack up for marginal deals.

All this presupposes that the disaster in sub-prime loans does not worsen further and infect other markets. The dog that hasn’t barked is the absence of more casualties. It cannot be only a few hedge funds and German banks that have been landed with all the toxic waste. Yet institutions are lining up to insist that their exposure is nil or tiny.

The sceptics point to the fact that some debt can be held off balance sheet. Then there is the difficulty of valuing illiquid debt and related derivatives. Investors cannot “mark to market”, which is the process of valuing assets according to the prevailing market price. Instead, they “mark to model”. That is, they value using a model and making assumptions that may be much too optimistic. But with perhaps the entire annual bonus at stake, it may be all too tempting to take an unrealistically sunny view.

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