Risk Management

Bonds, Not Banks, for European Corporates

With the banking sector under continuing pressure, European companies are breaking with tradition and raising more money from capital markets.
Andrew SawersAugust 8, 2012

European corporates are expected to increasingly access capital markets rather than banks when raising debt, motivated by lower rates on bonds and the desire to reduce their dependence on beleaguered lenders.

Research by Standard & Poor’s says corporate demand for new debt to finance growth in the euro zone and the United Kingdom will hit $1.9 trillion to $2.3 trillion in the period between 2012 and 2016. Up to half of this could come from the bond markets.

Over the course of the financial crisis, European companies have learned the lesson about the need to diversify sources of funding and liquidity, the S&P report says. Euro-area securities issuance grew 30% between 2008 and the third quarter of 2011, a period that saw little growth in the overall level of corporate debt.

Even now, though, the amount of capital-markets debt on European balance sheets is equal to just 7% of gross domestic product, compared with 35% in the United States.

S&P’s argument seems to be supported by the anecdotal evidence: in July Belgium’s AB InBev — which owns the Anheuser-Busch and Stella Artois beer brands — announced bond issues worth $7.5 billion. And earlier this month, consumer-products group Unilever completed a $1 billion bond issue.

With banks struggling to deleverage their balance sheets in a difficult economic environment and Basel III regulations nearing, financial institutions will likely reduce their assets by some $2 trillion during the next few years.

Research group Dealogic says that in the first half of 2012, European companies raised more money from capital markets than they did from banks. S&P expects this disintermediation trend to continue. The credit-rating firm thinks that about half of European corporates’ debt needs during the next few years will be met by bond markets, up from 15% historically. However, this would imply some $191 billion to $232 billion of net new yearly issuance by European nonfinancial corporate borrowers. There have only been two years in the past decade in which net new euro-denominated bond issuance by nonfinancials exceeded $100 billion.

“This presents a significant growth opportunity for European debt market investors, but also highlights the challenges confronting nonfinancial corporate borrowers,” says S&P. As euro-zone worries increase levels of uncertainty, issuance seems to be tailing off and European corporates may turn to the United States for their short-term funding needs.

However, investor appetite might not ultimately be a problem for investment-grade companies, which are now able to issue large bonds at very favorable prices. As rival ratings agency Fitch recently noted, “Banks now pay roughly the same — or higher — rates to borrow as the corporates they lend to.”

Andrew Sawers is editor of CFO European Briefing, a CFO online publication.