Bonds accounted for their biggest ever share of total European corporate debt funding in the first half of 2013 amid low interest rates and constrained bank lending, according to Fitch Ratings’ analysis.
The credit ratings agency (CRA) said that while bond funding is likely to remain attractive relative to loans, this trend may moderate in the second half of the year following the rise in the cost of funding towards end-H113.
In the first six months of the year European corporates issued €257bn in bonds, or 52% of the €495bn total new debt funding, according to data from Dealogic. The market share is well above the average of 36% for the period 2008 to 2012.
Total funding from bank loans was €238bn, suggesting the figure is heading for a full-year total below €500bn for the first time in a decade and may be little more than a third of the €1,245bn peak in 2007. Fitch plans to publish a special report in the next few weeks with a more detailed analysis of the data and a comparison with company balance-sheet debt structures.
The CRA added that the outlook for issuance in the second half of the year will partly depend on how investors view the prospect of central banks curtailing their monetary stimulus efforts and what extra yield they will demand to balance this risk. There has already been some evidence of new issue premiums rising, including the recent issues by Alstom and Vier Gas, which included new issue premiums of 20-25 basis points (bp), according to reports.
However, most European issuers are still likely to find bond funding attractive compared with loans in terms of pricing and maturities. Banks continue to face higher capital and liquidity requirements, which have put pressure on their ability to lend, while their own costs of funding have risen, making them less competitive than the bond market.
Fitch predicts that higher-rated investment-grade corporates will benefit from a ‘flight to quality in H213, while funding costs for high-yield and emerging-market issuers will rise because of higher yields and benchmark interest rates. Nevertheless, healthy bond issuance will continue, notably in the consumer, healthcare, technology, media and telecommunications (TMT) and transportation sectors, driven by increased capital expenditure (capex) and on-going debt refinance requirements.
The data reveals that the increasing preference for the bond market in recent years has significantly increased the overall proportion of corporate debt funded by bonds. Bonds now account for 82% of the total debt structure of developed-market European corporates, up from 68% in 2008.
This is a higher ratio than indicated by issuance volumes for bonds and loans because loans are typically stand-by in nature and are not normally fully drawn. It is also substantially higher than the common market perception that European companies rely on bonds for about a third of their borrowing and bank loans for two-thirds, while US companies have the opposite ratio.
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