European Corporate Bond Funding Disintermediation Reviewed

Fitch Ratings released further data on European corporate funding, following its
recent announcement
that European companies tapped more bonds than loans in the first six months of 2012, marking the first time that securities market issuance has outpaced the loan market.

The credit ratings agency (CRA) issued a report, entitled ‘European Corporate Funding Disintermediation’ showing that a total of €241bn in bonds was issued in H112; up 35% from €179bn in the same period of 2011. Fitch previously released data from Dealogic showing that bonds comprised 52% of new funding (bonds and loans) of €467bn compared with just 29% for all of 2011, the average since the introduction of the euro.

“European corporates are at an even more advanced stage of bond funding adoption than public bond and loan market data suggests,” said Monica Insoll, managing director of Fitch’s credit market research team.

“Bonds represented on average 73% of debt used by large European companies at the end of 2011, according to our analysis of 201 rated corporates with total debt of €1.6trillion. This ratio has risen every year from 53% in 2008 and for the largest and highest rated issuers, the proportion is stabilising at the 80%-85% level.”

According to the report, investors have shown strong interest in high-grade non-financial corporate issues in 2012. Sovereigns are perceived as much riskier now than before the crisis and banks are being subjected to numerous challenging developments. So corporates outside the peripheral eurozone countries have emerged as a relatively safe haven.

European high-yield issuers accumulated €33bn in new bonds in H112 in response to investors’ search for yield in the low-interest rate environment, a record level with H111. However, the market largely remained closed, or prohibitively expensive, to issuers at the lowest end of the rating scale.

The CRA reports that banks are finding it is increasingly difficult to price loans competitively to bonds and this is driving borrowers to the bond market. Banks now pay roughly the same, or higher, – rates to borrow as the corporates they lend to. In addition, banks are likely to pass on higher costs from increased regulatory capital and liquidity requirements with Basel III.

A video interview discussing the report findings can be accessed


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