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Bonds trump loans for European corporate funding, says Fitch


Market data shows historically high level of bond issuance

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European companies raised more money from the bond markets than from bank loans, with corporate bond issuance hitting €257 billion (£221.6 billion, US$340.1 billion) in the first half of 2013, according to Fitch Ratings.

In a report published this week, the agency noted that the figure was well above the average rate seen in recent years. It added that such a funding disintermediation trend is also reflected in the low volume of new bank loans to corporates during the same period, at €238 billion for the first half of this year.

On the basis of available data, Fitch reckons that loans are heading for a full-year below €500 billon for the first time in a decade, and may end up at little more than a third of the 2007 peak.

According to Monica Insoll, managing director in Fitch's credit market research team, bonds have become more popular since the start of the financial crisis as very low interest rates have made long-term fixed-rate funding attractive to issuers.

"For investors, corporate bonds have provided extra yield while being viewed as a relatively safe investment, with default rates remaining low. Meanwhile, banks have been deleveraging in order to boost capital and liquidity ratios," she added.

Furthermore, Fitch believes that market data showing the historically high level of bond issuance still "does not do justice to the importance of bond funding to European companies".

A bottom-up analysis using corporate balance sheet data reveals that bonds are already more important to Europe's corporates than is commonly perceived in the market, accounting for on average 82 percent of the total debt structure of developed market companies. Insoll opined that a well-functioning corporate bond market is crucial to the region's economy as a whole, as well as to its post-crisis recovery.

Fitch found that across sectors, countries and rating categories have joined the switch to bonds. In the agency’s 'AA' rating category, the median bond use was 88 percent while it rose to 55 percent in the 'BB' segment; the first time it exceeded 50 percent.

Research also indicated that emerging market issuers continue to tap the Eurobond market, notably from Russia, Ukraine, Czech Republic, Poland, Hungary and Turkey.

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Bonds trump loans for European corporate funding, says Fitch
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