How many times have you heard the mantra that in the US, companies get 80% of their funding from bonds and 20% from banks, while in Europe it’s the other way round?
This is usually followed by a prediction that Europe needs to move to the US model, and that bank lending is in decline.
Next time you hear that, you can tell the speaker “it’s already happened, and loans haven’t died”.
For large companies in the UK, France, Germany, Benelux and Switzerland, the share of drawn debt they hold as bonds is already between 80% and 90%.
As EuroWeek has highlighted before, the best source of information on this is Fitch’s studies of 201 large companies, in which it analyses their annual reports, rather than relying just on issuance data.
In Fitch’s sample, France and Switzerland have joined the most bond-reliant echelon in the past two years, but no country, industry or rating group has shown any tendency to go above 90% bond funding. The market seems to be settling at an equilibrium between 80% and 90%.
For Europe as a whole, the bond shares for double-A, single-A and triple-B companies are effectively ex-growth, or growing only at about one percentage point a year.
Periphery and low-rated catch up
Yet the bond funding share in Europe overall is still rising, because of growth in the peripheral Eurozone, eastern Europe, and among double-B rated companies in general.
The double-B group in Fitch’s sample (35 issuers with 11% of the total debt) changed their bond share from 46% to 55% between 2011 and 2012, while the peripheral eurozone has risen from around 45% to over 60% since 2009. Russia and Ukraine are flattish at around 30%.
So the secular pattern looks clear: big companies in the more peripheral parts of Europe are likely to increase their reliance on bonds gradually to the 80%-90% range used by those in northwest Europe.
Interestingly, Nordic companies are bucking the trend, with a bond share down 5 percentage points to 65% in 2012.
But what emerges equally clearly from the data is that loans remain extremely important to companies of all kinds — even if most of the volume is undrawn.
The $49bn bond issue by Verizon Communications in September has rightly been read as a demonstration of the bond market’s awesome power. Yet the takeover also involved a record $61bn acquisition bridge underwritten by four banks — and $12bn intended to be placed as loans. The bond market’s yawning appetite strengthens the banks’ ability to underwrite in size.
Loan revival
An update Fitch published last week, taking in data to September, shows a resurgence of new loan borrowing by companies in the big three markets of Germany, France and the UK. These have taken out more new loans than bonds this year, a reversal of the picture in the first nine months of 2012.
By contrast, new borrowing in the GIIPS countries and CEE shows the trend to bonds continuing. But across the continent, 54% of all corporate debt facilities taken out this year have been loans, using Dealogic figures.
Analysis of Dealogic data by a European investment bank shows that in Emea, there are now over 8,000 syndicated loan facilities outstanding – more than before the financial crisis. Loan volumes issued and drawn may be way below where they were in 2005-7, but more companies than ever want access to the product.
As one leading loans banker said last week: “I have never met a corporate treasurer or CFO who didn’t care about the banks, or about access to loans.”
Lean, mean lending machines
Further down the size scale, banks remain far more important than the capital markets to corporate finance, and that is likely to continue.
Small companies need small pieces of debt, and they need the flexibility to draw and repay at short notice. Modern banks are machines built to analyse, process and service large quantities of small loans efficiently. The sheer size of their portfolios means they can price individual facilities more keenly.
Institutional investors will chip away at the mid-caps, which are starting to follow bigger firms into bond or private placement markets. But the banks need not lose any sleep. The institutions are neither undercutting them on price nor fast-moving.
M&G Investment Management’s UK Companies Financing Fund II, launched at the beginning of this year, had by September made two loans, of £45m and £10m. An insurance company with a similar fund is said to have passed on 50 deals it was shown.
More diversity and competition are welcome, but on the whole, for the huge lower layers of the corporate pyramid, banks are it. If their balance sheets are freed from much of the drawn debt of blue chips, there will just be more room for smaller borrowers.
