Bonds Beat Loans to Take Record Share of Europe Company Funding
European companies favored bonds over loans this year by the biggest proportion as banks reduce lending, according to Fitch Ratings.
Of the 495 billion euros ($638 billion) companies borrowed in the first six months, 52 percent was raised through bond sales compared with an average 36 percent of total annual debt financing in the past five years, the ratings company said in a report, citing data from Dealogic. Bank loans, which totaled 238 billion euros, are poised to reach less than 500 billion euros for the full year for the first time in a decade, the data show.
Banks have tightened lending as they seek to meet tougher capital requirements imposed by global regulators after the financial crisis. European companies turned to bond markets for funding as central banks kept interest rates near record lows.
Companies have struggled to obtain loans in the post-economic crisis, which has resulted in a “structural shift” toward bond financing, Monica Insoll, managing director for credit market research at Fitch Ratings, said in a phone interview.
The average yield investors demand to hold company bonds in euros fell to a record 1.72 percent on May 17, according to Bank of America Merrill Lynch’s Euro Corporate Index. It has since climbed to 2.15 percent.
Fitch expects European companies to continue choosing bonds instead of loans in the next six months, even as the U.S. Federal Reserve considers scaling back stimulus measures.
“On the one hand, there are negative pressures,” said Insoll. “The Fed will start raising rates. But on the other hand, there aren’t that many alternatives out there so bonds will continue to be used.”
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