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
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