Since 2012, Nordic large corporates have increased their dependence on financing through debt capital markets while at the same time cutting their share of funding from bank loans. More capital markets funding creates a new set of risks that need to be addressed, Johan Trocmé and Viktor Sonebäck from the Thematics team in Nordea Research argue in new podcast.
The financial crisis of 2007-2008 and the following euro/Greek crisis have fundamentally changed the historical corporate reliance on bank financing. Trocmé and Sonebäck have studied 80 large Nordic corporates of which half are rated by Standard & Poor’s. Among the rated companies the share of financing through the debt capital market had increased to 53 percent in 2017 from 38 percent in 2006. The unrated corporates saw the share rise to 19 percent from 7 percent.
The development is mainly due to two key drivers, they argue. The first is a pull factor. Low interest rates have investors chasing returns, which has put focus on the potentially higher yield of corporate bonds versus government bonds. The second driver is a push factor. The post-crisis regulation placed on the financial sector now requires banks to hold bigger capital reserves for their lending. It has thus changed the profit potential of corporate lending and given banks incentives to encourage corporates to look for funding elsewhere.
Relying more on debt capital market funding, however, means a different set of risks for corporates, as they are now more at the mercy of the potential volatility of the markets. After 2012, Nordic large corporates have issued corporate debt of about 35 billion euros per annum versus about 10 billion annually before 2006. Historically the downside for bond issuance in a shaky market environment has been about 10 billion euros and in case of a downturn this financing would have to come from somewhere else.
As Trocmé and Sonebäck expect that the trend of raising money through the debt capital market will continue to grow long term, corporates need to plan for how to access financing in a weak market environment.
Learn more by listening to the podcast Stormy Waters from Nordea Markets Insights Global.
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