European companies raised more money from the bond markets than from bank loans in the first half of 2013, as corporate bond issuance hit €257bn – well above the average rate seen in recent years, says Fitch Ratings.
According to the credit ratings agency (CRA), this funding disintermediation trend is also reflected in the low volume of new bank loans to corporates during the same period. At €238bn for H113, this suggests loans are heading for a full-year below €500bn for the first time in a decade and may end up at little more than a third of the 2007 peak.
“Bonds have become more popular since the start of the financial crisis as very low interest rates have made long-term fixed-rate funding attractive to issuers,” said Monica Insoll, managing director in Fitch’s credit market research team. “For investors, corporate bonds have provided extra yield while being viewed as a relatively safe investment, with default rates remaining low. Meanwhile, banks have been deleveraging in order to boost capital and liquidity ratios.”
Fitch believes that market data showing the historically high level of bond issuance still does not do justice to the importance of bond funding to European companies. A bottom-up analysis using corporate balance sheet data reveals that bonds are already more important to Europe’s corporates than is commonly perceived in the market, accounting for on average 82% of the total debt structure of developed market companies. Hence a well-functioning corporate bond market is crucial to the region’s economy as a whole as well as to its post-crisis recovery.
The CRA’s report, entitled ‘European Corporate Funding Disintermediation’, shows that issuers across sectors, countries and rating categories have joined the switch to bonds. In the ‘AA’ rating category, the median bond use was 88% while it rose to 55% in the ‘BB’ segment – the first time it exceeded 50%. Emerging market issuers also continue to tap the eurobond market, notably from Russia, Ukraine, Czech Republic, Poland, Hungary and Turkey.
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