Fitch Assesses Changing Funding Landscape for European Companies

Macro prudential reform in the post-crisis era is altering the cost and availability of funding for European corporates, according to Fitch Ratings.

The credit ratings agency’s (CRA) report, entitled
’The Impact of Macro Prudential Reform – European Corporates Adapt to A Changing Funding Landscape’
, says that macro prudential policies and regulations continue to develop in the post-crisis era in an effort by authorities to strengthen the global financial system.

By directing the lending of banks and investors such as insurance companies in various ways, they have a direct impact on credit markets. Capital and liquidity requirements on banks and insurance companies from Basel III and Solvency II, together with credit retention rules, are fundamentally altering the landscape for traditional bank and capital market borrowers. While many outcomes are desirable, others represent unintended consequences.

Banking regulation has been aimed at strengthening banks’ balance sheets, says Fitch. Basel III capital requirements are having a big impact on lending choices. The improvement in European banks’ capital ratios in recent years is partly a result of reducing and shifting exposures away from capital-intensive sectors, primarily corporate lending.

Insurance companies, together with other institutional investors, already play an important role in funding large corporates by investing in bonds. With banks constrained in lending, insurers are increasingly involved in extending loans directly to companies. However, macro prudential regulations such as Solvency II also influence capital allocation in this sector.

Large investment grade corporates as well as leveraged buy-outs (LBOs) have embraced bond funding. The European high yield (HY) bond market has boomed since 2009 and in the first half of 2014, issuance volumes beat the US market for the first time.

Leveraged loans, in contrast, have lagged this trend considerably. The incentives for HY bond issuance is supported by macro prudential regulation as European banks require capital support from subordinated instruments and face comparatively high capital charges for speculative-grade corporate exposures.

For small and medium-sized enterprises (SMEs), securitisation of corporate loan portfolios provides the main route of access to institutional investors. However, the securitisation market has been particularly hard hit following the crisis. Net issuance of collateralised loan obligations has remained negative as Basel III capital treatment of the asset class has led to banks selling legacy exposures and limiting new issuance.

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