Fitch Ratings says that European corporates tapped more bonds than loans in the first half of 2012, marking the first time securities market issuance has outpaced the loan market; a trend that it expects to continue.
The credit ratings agency (CRA) says that over the six months ending 30 June, data from Dealogic shows 52% of the €467bn of new European corporate funding was through bonds. The figure compares against just 29% for the full year in 2011, also the average rate since the introduction of the single European currency in 1999.
Fitch believes that many companies are turning to the debt capital markets to diversify their funding. The process of corporate funding disintermediation has accelerated, due to higher capital and liquidity requirements that have put pressure on banks’ ability and willingness to lend. The cost of funding for banks has also risen, as market sentiment is less favourable than before the subprime crisis, while confidence has declined with the eurozone crisis. These pressures make it more difficult to offer the competitively-priced loans that the region’s companies have been used to for decades.
The CRA does not expect European levels to hit the extremes of the US market, where bond funding far outpaces the loan market, as treasurers are likely to want to maintain banking relationships partly as a safety net. It says that banks are more likely than a disparate group of bondholders to quickly extend financing to a distressed corporate, or when a company needs lifeboat funding. US corporates are less reliant on bank financing in times of trouble, because of Chapter 11 bankruptcy protection rules and deeper capital markets.
High-grade corporates have been able to circumvent tightened lending conditions and gain cheaper funding from the international bond markets, due to their safe-haven status. Many of the investment grade companies that managed to issue over the recent period of market stress were able to sell bonds at historically low all-in costs, although access to the market has been sporadic.
Fitch concludes that lower-rated corporates and smaller companies may bear the brunt of further disintermediation, with alternative funding for these borrowers more likely to come from government-encouraged or sponsored initiatives, non-bank lenders or structured products are also more likely sources of funds than capital market bond issuance. However, while certain parts of the structured finance market, such as deals backed by auto loans or credit cards, continue to function much of the market is hobbled by uncertainty.