Debt Hangover – Credit Tap Turns Off

market analysis

Regulatory requirements have caused banks to turn off the 'credit tap' for many corporates

By

Paul Ashworth, Managing Partner
David Clark, Director
Tristan Bowman, Manager


Posted 25 January 19

Since the Global Financial Crisis, global banks have stepped back from lending to corporates as they adapt to the litany of regulatory changes and higher capital requirements.

This has led to a boom in the corporate bond market, as corporates looked for alternative funding sources and found a readily available pool of investment capital attracted to the higher yields on offer. Today, 19% of global non-financial corporate debt comes from bonds, up from 10% in 2007.

The widening and deepening of corporate debt markets is usually good for economies, as it expands the capital available to foster growth - for this reason, we see the US model of mixed funding between banks and bonds expanding to other developed economies. The challenge to this model comes when corporates seek to refinance loans that have accumulated in the ‘good’ times but find a bond market that is more risk-averse; this is the environment that we find ourselves entering into.

The period between 2018-2022, sees a peak in refinancing requirements – estimated at between $1.6 trillion and $2.1 trillion annually.

Global Non-Financial Corporate Bonds Outstanding by Region

Diagram showing Global Non-Financial Corporate Bonds Outstanding by Region

Credit Availability Reduced

Reduced liquidity in the bond market due to the reticence of investors is likely to drive up the costs of refinancing debt. In some cases, corporates may be unable to roll-over debt and be forced to repay principal from retained earnings or equity capital raisings. With global corporate default rates already above the 30-year average, any increase in debt funding costs or reduced availability of credit could be unsustainable for some corporates.

The end of 2018 showed signs of increased difficulty for debt markets, with the volume of new bonds issued in December the lowest in at least a decade and the annual total down over 25% from 2017. The year-end was also marked by several companies pulling debt deals as investors baulked at buying into new bonds. A notable local example was the cancelling of Lendlease’s debt issuances following a corporate profit downgrade.

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