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December 2, 2012 6:06 pm
Lending by bank syndicates to companies in the eurozone has fallen to the lowest in a decade as pressure on the region’s financial institutions speeds a structural shift towards capital market funding.
Highlighting how the sovereign debt crisis has pushed Europe closer to a market based US model of corporate finance, syndicated bank lending has fallen 45 per cent so far this year compared with the same period in 2011.
In contrast, eurozone corporate bond issuance has increased 42 per cent to $316bn, according to data from Dealogic, which is the second highest ever annual figure in records going back to 1995.
“Banks just do not have the capacity to lend as they did before,” said Mathew Cestar, head of European leveraged finance at Credit Suisse.
Banks have scrambled to delever their balance sheets to meet Basel III and other regulatory capital ratios. Large European banks are expected to shed $2.6tn, or about 7 per cent of their total assets, by the end of 2013, according to the International Monetary Fund.
Syndicated lending, where banks club together to provide financing to large corporates, remains a relatively small part of total bank lending in Europe, where bilateral loans to smaller groups dominate total volumes. But the fall in syndicated lending points to a wider trend.
Leading the switch to corporate bond issuance have been midsized companies. Large multinationals have long used the public markets, while the market for smaller companies’ debt remains under-developed.
This year Hochtief, the German construction group, Sanoma, the Finnish media group, and Snam, the Italian gas infrastructure group, have borrowed from public markets rather than banks for the first time.
Historically low central bank interest rates have stoked investor demand for corporate credit and allowed groups to borrow at record low rates.
The “bank to bonds” trend has been strongest in “core” eurozone countries, such as Germany, where more institutional investors feel conformable investing.
In the periphery, syndicated volumes are down just 20 per cent to $69.5bn over the year compared with a fall of 50 per cent to $162bn in the core. Bond issuance is up sharply in both regions, however.
“In a world in which corporates have become the safest asset class, a bank lending to a company is like a sick person curing a doctor,” says one eurozone banker.
“If you are a CFO or company treasurer, you don’t want to rely too much on precautionary lines from banks, in case the bank is not there when you need it.
“But capital markets do not have the flexibility of banks. You need a smart balance between bank lending and capital markets.”
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