Bonds Play Lesser Role in European Corporate Funding
The proportion of new European corporate funding accounted for by bonds has shrunk for the second year running as banks are increasingly keen to lend, supported by continued loose monetary policy, reports Fitch Ratings.
In its report, entitled
‘Corporate Funding Disintermediation 1Q15’
, the credit ratings agency (CRA) reveals that total new debt (bonds and syndicated loans) rose 3% to a post-crisis record of €1.075 trillion in 2014, according to Dealogic data.
Bonds accounted for 39% of total new debt, down from 43% in 2013. While over the year in total bond issuance contracted by 6% to €419bn and loans expanded by 9% to €656bn, volumes in the fourth quarter of 2014 were unusually weak, especially for loans which hit their lowest level since Q3 2009. This trend has continued into 2015, with year-to-date bond and loan issuance at their lowest levels since 2010 and 2011, respectively.
Total new debt raised is less than three-quarters of the 2007 high of €1.5 trillion when loans accounted for a record 84%. This gap may reflect the fragile nature of Europe’s economic recovery, with the corporate sector investing only cautiously in view of deflationary pressures. While companies are facing a 2015 funding landscape of ample and low cost debt from bond investors and bankers alike, demand will mainly come from refinancing and merger and acquisition (M&A) rather than from capital expenditure (capex) needs.
Oil/gas and energy/utility companies drove the main sector change in 2014 as they reduced bond issuance, reflecting lower expansionary capex in the wake of the sharp fall in oil prices. The former sector’s issuance was down by one third, and the latter’s by one quarter. By contrast, telecom and healthcare issuance grew strongly amid ongoing in-market consolidation. Loan volume trends were in line with all these bond market sector trends.
On a regional basis, eurozone periphery corporate bond issuance contracted – 21% for Spain and 10% for Italy – reversing the trend of bond investors stepping in to fill the gap from retreating lenders. Loans to companies in this region were up marginally on balance – up strongly in Greece, Ireland and Portugal; 5% in Spain; but down 17% in Italy. In Europe’s three largest economies – Germany, France and the UK – corporates boosted funds by 16% in aggregate, spread across bonds and loans in all three countries.
Issuance by Central and Eastern European companies was down by around €70bn compared to 2013 (bonds and loans combined). Russia accounted for more than half this shortfall. Geopolitical risks, domestic currency devaluation and slower growth will affect emerging-market issuers to varying degrees this year.
The telecoms, pharmaceutical, building materials and utilities sectors will see continued structural rebalancing in 2015, says Fitch. Together with the drive to boost revenues in a slow growth environment, this will lead to an increase in the level of strategic M&A activity in the near-term – likely to be funded through a mix of new bond issuance, bridge financing and equity..