ECB Survey Points to Further Corporate Funding Disintermediation Pressures

The European Central Bank’s (ECB) quarterly bank lending survey suggests pressure for European corporate funding disintermediation will continue as banks impose stricter lending standards, according to Fitch Ratings.

The ECB’s latest survey found a net 10% of banks reported they had tightened credit standards on loans to enterprises in Q212, up marginally from 9% in Q112. A net 10% also indicated that they expect credit standards to tighten again in the third quarter. The findings support Fitch’s expectations that large European companies will continue to slowly increase their reliance on bonds, particularly as the survey also indicates that tighter credit standards have been applied more to large companies than to small and medium-sized enterprises (SMEs).

The credit ratings agency’s (CRA) research indicates that bonds represented 73% of the debt used by large European companies at the end of 2011. The figure rose from 53% in 2008, but the rate of growth has now slowed, partly because the highest-rated issuers appear to have reached a plateau in the range of 80% to 85%. These borrowers may be unwilling to cut bank borrowing further because of the need to maintain relationships with banks, which can offer a safety net and more flexible day-to-day financing than capital markets.

Disintermediation at the lower end of the ratings spectrum is likely to rise further, due to both its much lower starting point and investors’ search for yield in the low-interest rate environment, which drove a high-yield issuance boom in the first half of 2012.

Banks’ views on the demand for loans remains negative, but less so than in Q112, according to the ECB survey. A net 25% of respondents reported falling demand, compared with 30% in the prior three months. Fitch expects this low demand to persist until the eurozone crisis is over and companies’ appetite for capital expenditure and merger and acquisition (M&A) returns.

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