BIS published a bulletin. or a short note, that examines bond issuance and syndicated loan origination during the COVID-19 crisis. The note explains that borrowing of non-financial firms in global debt markets surged following the COVID-19 shock. Bond issuance boomed, while syndicated loan origination trailed. The note highlights that, due to easier access to bond markets, large firms significantly increased their borrowing. The rest of the firms faced bottlenecks due to their reliance on a strained syndicated loan market and hurdles in switching to bond markets. Large firms, which had lower cash buffers before the crisis, in comparison to smaller firms, used part of the fresh credit to raise their buffers in addition to meeting liquidity shortfalls.
The findings draw on the worldwide bond issuance and loan origination by non-financial firms in debt market, which is a major source of funding for large and mid-size firms. As of the end of 2019, firms from 121 jurisdictions had outstanding bonds and syndicated loans. Using the global debt market data for up to early June 2020, BIS documented that bond issuance surged but syndicated loan origination trailed. Net bond issuance rose substantially relative to levels seen during the previous year. In contrast, syndicated loan origination did not follow the surge in bond issuance. The decoupling of bond and syndicated loan markets is reminiscent of a broadly similar trend observed during the great financial crisis. Although the current crisis did not originate in the banking sector, banks seem to be pulling in their horns as their lending capacities have been hit and a dim economic outlook has made them more cautious. Meanwhile, collateralized loan obligation (CLO) issuance has declined and end-investors have become more risk-averse, which has created additional blockages in the complex plumbing of the syndicated loan market.
A firm-level perspective shows that borrowing by large firms in debt markets has outpaced that of mid-size firms. At the firm level, the bulk of new borrowing has been raised by large firms—with revenues above USD 1 billion—reflecting their better access to the booming bond market. The greater share of large firms in new borrowing occurs despite the fact that they may be facing lower or comparable liquidity shortfalls compared with mid-sized firms. While large firms have probably used borrowing proceeds to meet short-term liquidity shortfalls, some indicators suggest that these firms are building precautionary buffers too. Likewise, an increase in the average tenor of issuance points to firms striving to avoid near-term refinancing needs. Like in the aftermath of the great financial crisis, large firms may gradually use or decommission these buffers and, thus, better cope with economic uncertainty. However, dominance in bond-based borrowing by large firms could crowd out mid-size firms, which are also creditworthy and may exhibit significant liquidity needs.
Keywords: International, Banking, COVID-19, Bond Issuance, Loan Origination, Syndicated Loans, Credit Risk, Liquidity Risk, Collateralized Loan Obligations, BIS
Leading economist; commercial real estate; performance forecasting, econometric infrastructure; data modeling; credit risk modeling; portfolio assessment; custom commercial real estate analysis; thought leader.
FCA is consulting on its approach to the authorization and supervision of international firms operating in UK.
MAS published amendments to Notice 637 on the risk-based capital adequacy requirements for reporting banks incorporated in Singapore.
FCA announced that it will move firms to RegData from Gabriel in the coming months in stages, based on the reporting requirements of firms.
APRA has concluded its review of the comprehensive plans of authorized deposit-taking institutions for the assessment and management of loans with repayment deferrals.
ESAs (EBA, EIOPA, and ESMA) published the first joint report that assesses risks in the financial sector since the outbreak of the COVID-19 pandemic.
BoE and HM Treasury confirmed that the COVID Corporate Financing Facility (CCFF) will close for new purchases of commercial paper, with effect from March 23, 2021.
ESAs launched a survey seeking feedback on the presentational aspects of product templates under the Sustainable Finance Disclosure Regulation (SFDR or Regulation 2019/2088).
ECB published input of the European System of Central Banks (ESCB) into the EBA feasibility report on reducing the reporting burden for banks in EU.
EC adopted a decision determining, for a limited period of time, that the regulatory framework applicable to central counterparties, or CCPs, in the UK and Northern Ireland is equivalent to the requirements laid down in the European Market Infrastructure Regulation (EMIR or Regulation 648/2012).
EBA has decided to phase out the guidelines on legislative and non-legislative moratoria of loan repayments, in accordance with the earlier specified end of September deadline.