Low interest rates and constrained bank lending push European corporates towards bonds

Bonds accounted for a record share of total European corporate debt funding in the first six months of 2013, amid low interest rates and pressures on banks’ ability to lend, according to analysis from Fitch Ratings’ (release).

In the first half of the year, European corporates issued €257bn (£221bn) in bonds – amounting to 52 per cent of total new debt funding. By comparison, the average market share for 2008 to 2012 is 36 per cent.

Funding from bank loans in the first half of the year was just €238bn, indicating the full year total could fall below €500bn for the first time in a decade.

The outlook for issuance in the second half of the year will partly depend on how investors view the prospect of central banks curtailing their monetary stimulus efforts and what extra yield they will demand to balance this risk. We have already seen some evidence of new issue premiums rising, including the recent issues by Alstom and Vier Gas, which included new issue premiums of 20-25bp, according to reports.

However, most European issuers are still likely to find bond funding attractive compared with loans in terms of pricing and maturities. Banks continue to face higher capital and liquidity requirements, which have put pressure on their ability to lend, while their own costs of funding have risen, making them less competitive than the bond market.