(August 15, 2012) — Intuitional investors are becoming more tempted to loan directly to companies as bank lending continues to dry up, but mis-matched expectations between borrowers and lenders are holding up progress.
Restrictions on bank lending brought about by incoming regulation around the world has meant areas of business that used to rely on the same financial partners are having to look elsewhere, a report by Standard & Poor’s (S&P) Credit Matters team highlighted this month.
Taron Wade, associate director at the ratings agency and research firm, said a dearth in bonds being issued in the high yield and mid-markets paved the way for capital-rich and return hungry investors – something several market participants have been advocating since the credit crunch hit.
“Even though the loan market will return, there is a lot of interest from pension funds and insurance companies to come into the market and replace the structured demand – the collateralised loan obligations (CLOs) that are coming out of their reinvestment period for example,” Wade said.
In the first half of this year, debt capital market volumes slumped from an already poor state in 2011, according to Thomson Reuters. Data from the firm showed a 7% drop in fixed-income issuance in the first six months overall. High yield bond issuance in the second three months of 2012 was down 50% on the first quarter, the data monitor said.
Wade said it would take time to develop a functioning market between investors and companies, so the high yield market would have to struggle on in the immediate short-term.
“Despite difficulties, there is innovation,” said Wade, highlighting moves by exchanges to create retail bond platforms and the Association of Corporate Treasurers mooting a private placement market in Europe, like the one established in the United States.
However, mis-matched expectations over pricing are also stopping flow between borrower and lender.
Wade said: “The rate of return is lower than what investors want and companies are not prepared to pay much higher [rates]. This is exacerbated by little leverage in the system, meaning investors are not getting leveraged returns.”
Wade was reporting from a conference on credit markets, the panels of which were populated by banks, credit analysts and institutional investors. For the full account, click here.