June 9, 2013 7:08 pm

EM groups look to bonds rather than banks

Emerging market companies are getting three times as much funding from the bond markets as they are from bank syndicates, the biggest gap in at least a decade, as regulatory changes prompt structural shifts in global corporate funding.

Companies based in Asia, Africa and Latin America borrowed half as much from banks in the second quarter compared with the same period last year, while market borrowing has risen by two-thirds, according to Dealogic.

Emerging market bond issuance

Emerging market bond issuance
% of combined bond and syndicated loan issuance

The sizeable jump is part of a wider trend of emerging market companies turning to the public markets since the start of the financial crisis, even as eurozone banks, under regulatory pressure to reduce risk, have withdrawn lending from non-core areas.

“Many banks that were once active in emerging market lending are pulling back,” said Stefan Weiler, head of emerging market debt for eastern Europe at JPMorgan. “But the bond markets have largely been wide open.”

In the last three months, companies have issued bonds worth $122.7bn in various currencies, while they took on $37.5bn in syndicated loans, the biggest gap on record.

Emerging market companies are also being attracted by the steep fall in borrowing costs on the back of central bank action. Average borrowing costs on global “junk” corporate bonds have fallen from 8.2 per cent a year last June to 4.6 per cent, according to Barclays indices, although costs have started to rise again in recent weeks amid wider markets turbulence.

The biggest ever emerging market bond was issued in May by Petrobras, Brazil’s state-controlled oil company. The group sold $11bn of bonds into the international markets, with strong demand pushing the order book to more than $40bn.

There has also been a rush of emerging market companies issuing bonds for the first time. The biggest has been from Nanjing Housing Construction Group in China issuing a $1bn bond in May.

“While European banks have become increasingly risk averse, the bond markets are showing no such constraint and have never been lending more to emerging market corporates,” said Shamaila Khan, portfolio manager at AllianceBernstein.

The Basel III global banking regulations are also driving the loan-to-bond shift, because banks around the world have to hold more capital against loans and therefore are charging higher rates.

The biggest rise in emerging market bond funding over loan funding since the crisis has been in Asia, where European banks have pulled back the most. The shift in Latin America and Africa has been slower and less dramatic.

The same broader trend has been playing out in the eurozone, where loan volumes have fallen sharply as banks retrench. It has stoked hopes that Europe is moving long-term towards a more US-style markets-based corporate funding model.

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