New bond street

EU corporate bonds: Not everything debt-related about the crisis has been a disaster. Corporate borrowers in Europe have discovered an appreciation for the bond markets. Record issuance followed the collapse in bank loans. If the shift in funding continues, it will be one of the welcome developments from the mess.

In the first half of the year, European corporate issuance tallied $344 billion. That’s already a third more than was issued in all of 2008, according to Thomson Reuters. It’s also 70 per cent more than corporate loan volumes so far – a huge reversal of the borrowing mix for European companies, which have clung to the idea of “relationship banking” for longer than their US counterparts. In 2007, the $1.4 trillion of corporate loans was six times the continent’s bond issuance.

Some of the decline in loan volumes can be attributed to reduced demand. Companies have simply been investing and acquiring less to brace for the downturn. But more of it has been a result of the rapid and widespread bank deleveraging that has pushed loan prices up, and for some, all but closed the business down.

Where banks have shied away from lending, investors have been all too eager to do so. Corporate bond spreads have been attractive against low-yielding government bonds. Equities, despite their second-quarter surge, were considered too risky for many a few months ago. Even retail investors have been piling in to corporate bonds.

The liquidity in the bond markets is no panacea – now or in the future. Only large companies can access them. Moreover, investors have already started to become more discerning about which paper they buy. As spreads have come in and equities have rallied, the appeal of bonds could decline. There’s a risk the tide that rushed in could flow out.

European companies also will inevitably turn back to their trusted lenders – once they can be trusted again. But having had a bigger taste of the flexibility afforded to them by the bond markets, they’re apt to tap a healthier mix of liquidity going forward. They’ll have the crisis to thank for that.