In a report from ratings agency Standard & Poor’s, it said higher capital requirements for banks under Basle III regulations is fundamentally driving the structural shift as bank lending to companies becomes restricted and loan costs rise. “These [regulations] are likely to increase banks’ incentives to lend for shorter terms and reduce the amount of bank lending available, thereby pushing up the cost of bank borrowing,” says Andreas Kindahl, primary credit analyst at S&P in Stockholm.
He adds: “As banks tighten their lending standards, companies are coming under pressure to explore other funding options.”
This structural shift in the Nordic region and Europe, particularly, has been expected for some time but the credit crisis and onset of Basle III regulations, combined with booming investor demand for corporate bonds, has accelerated the trend.
“We believe that the bond market, in Europe in particular, has become a more attractive term-funding market than the syndicated loan market and that this will persist beyond the current tough lending environment,” says Kindahl.
It is view corporate treasurers from some of the biggest companies in Sweden and Nordic region share.
At a Euromoney conference in Stockholm earlier this month, Peter Hjalmarson, group treasurer of Getinge AB, a medical technology company providing specialist equipment and systems to the healthcare and life sciences sectors, said: “The new regulatory environment may be forcing companies to access capital markets funding, but traditionally it has been expensive and now it is more affordable.”
Getinge sold its first bond in May this year – an unrated SEK1 billion three-year floating rate note that was priced with a spread of 190 basis points over three month Stibor. Danske Bank, Nordea and SEB lead arranged the sale, which will be used to partly refinance acquisition debt.
“The primary benefit to us of accessing the capital markets is flexibility. Getinge has ambitious growth plans – aiming to double in size in 5-7 years – and the company needs flexibility to fund this growth,” said Hjalmarson.
Björn Lindström, group treasurer of Vasakronan, Sweden’s largest real estate company and one of the country’s largest corporate borrowers, said the primary benefit of accessing the capital markets is “the funding diversification it offers and the lower financing costs”.
Companies throughout Europe and the Nordic region have traditionally relied heavily on cheap bank loans for funding, with a smaller proportion of their total annual funding raised on the international and domestic capital markets.
This is in stark contrast to the US corporate sector where companies have traditionally raised the bulk of their funding on the domestic and international capital markets.
While Europe and the Nordic region are at the very beginning of this structural shift, it is set to be one of the most defining developments in corporate finance and investment banking this decade.
“We believe the financial turmoil of recent years has provoked a rethink among companies, who now question whether their traditional reliance on bank debt finance could undermine their economic stability and growth,” says Kindahl.
“The net result, in our view, is that corporate treasurers will increasingly view the capital markets as an attractive source of liquidity for term financing and a way to reduce their dependence on banks.”
However, for the meantime, S&P expects relationship bank lending to remain the largest funding source for corporates in the Nordic region, but anticipate that the share of funding from bond markets will increase.
“A deep, liquid, and mature corporate bond market would provide a viable alternative to fund an impending credit shortage for Nordic corporate entities...Nevertheless, this will take time,” says Kindahl.
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He adds that several factors impede the growth of corporate bond markets in the Nordic region, not least the fact that Nordic banks are generally well-capitalized and liquid, and are therefore not under as much pressure as some of their European peers to trim lending.
In addition, Kindahl says transparency around credit risk is “relatively low, required investment amounts are high, domestic bonds generally lack secondary market liquidity, and investors have limited choice given a shortage of rated companies.”
The relatively high cost of capital market issuance, coupled with more attractive funding alternatives, also stands in the way of healthy domestic corporate bond markets.
“Many institutional investors have allocation mandates that restrict investments in corporate bonds and many funds do not invest in bonds issued by speculative-grade companies. Even when mandates let them participate in regional issuance, there are strict constraints on volume,” says Kindahl.