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Banks to supersede firms as key borrowers in 2010
Published in The Saudi Gazette on 09 - 01 - 2010

Financial institutions will take the spotlight from corporates as the biggest and most important borrowers in 2010, with high-grade companies' needs set to fall although high-yield and M&A financings could be prominent.
Global corporate bond sales of $1.02 trillion were the biggest ever and a 42 percent jump on 2008, while high yield issuance reached a three-year high at $153 billion.
This was facilitated by impressive investor flows into fixed income, attractive corporate yields compared to risk-free assets and rosier outlooks for economic activity. The momentum provided by those trends is now abating and attention is now returning to the financial sector.
“Clearly a large challenge awaits the financials (banks) market. That includes a lot of refinancing to be done, considerable uncertainty on regulation and against a backdrop of 1 trillion euro plus redemptions over the next few years, just in the euro zone,” said Ryan O'Grady, head of EMEA fixed income syndicate at JP Morgan.
For the past 12 months, banks have been supported either by state backing for their bond sales or directly via cheap funding central bank liquidity schemes. These are being formally withdrawn or discreetly discouraged as policy makers seek to make banks independent.
Since October 2008 some $845 billion has been raised under government guaranteed bond schemes in 16 countries. This of course does not include central bank repo facilities.
Banks might be trying to shrink their balance sheets but political pressure, and long-standing commitments made during the credit bull market, are making that difficult.
“I think volumes will increase dramatically, although it's a big question how it will be all be absorbed. A lot of banks had financing through the government guaranteed market and that has largely come to an end. We think there is something like 500 billion euros of European bank supply to come into the market in 2010,” said Christopher Tuffey, head of European debt capital markets at Credit Suisse.
It is not just a question of sizeable supply but also of risk appetite and how investor demand is structured. Banks have been over-reliant on short-term, floating rate bonds. They need to raise longer-term finance which could be dominated by fixed rate investors.
Furthermore, options such as securitization and covered bond markets are fragile or not a viable option for many borrowers.
“It's worrying when you think about how limited capital markets access is for the second and third tier banks. The US banking system has hundreds of mid-cap banks that don't have decent access right now,” said O'Grady.
Companies sold bonds at an unsustainable rate in 2009, with issuance of 367 billion in the first quarter alone; equal to the first half volumes of 2008 and greater whole of activity seen any year prior to 2006 - save the telco-driven boom year of 2001.
No one is expecting a rerun of 2009 when US corporate issuance (excluding financials) rose by 30 percent to $345 billion.
“In the US it'll be a lot lower than what we saw this year, it could be two thirds or even half of that,” said O'Grady. He said that cash, as a proportion of corporations' balance sheets is at the highest level since the 1950s.
In other words, in 2010, US corporations are unlikely to be as preoccupied with raising cash as they were this year.
“M&A will be one of the factors driving debt issuance volumes in 2010, the largest bond deals have historically been driven by M&A, as Pfizer and Roche were this year,” said Jim Glascott, head of global debt capital markets at Barclays Capital.
There will not be a substantial drop from the strong pace of European corporate activity this year if the switch from bank to bond financing continues to be a strong theme for European high grade companies.
Bankers think it will likely continue down into the high yield sector.
“In European investment grade companies, some 75 percent of their debt is in bank loans and 25 percent in bonds, whereas the picture is reversed in the US,” said Glascott.
But bankers such as Tuffey suggest global corporate investment grade volumes will be lower next year, unless there is a substantial amount of M&A.
“I do think the high yield and the unrated markets will be much bigger, which will be helped by greater investor appetite,” said Tuffey.
Joe McGrath, head of global leveraged finance at Barclays Capital, said that the leveraged and high yield markets were still very well supported having shaken off the noise in the market over Dubai.
McGrath said that “For 2010 we are very constructive with an expected increase in M&A activity from acquisition financing for corporations and financial sponsors.


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