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Corporate bond issuance in Europe
Where do we stand and where are we heading?
The corporate bond market in Europe has become a focus of attention. In the aftermath of the crisis, European corporates have started to use debt capital markets more intensively, the volumes of corporate bonds issued have grown and yields have come down. While offering opportunities to European corpor-ations in the shape of low-cost external financing, this steady trend also poses challenges for investors.
The remarkable growth in debt capital markets points to a structural change in corporate financing in Europe. As the availability of bank lending has been shrinking in some countries, mostly due to the enduring impact of the financial crisis and new regulatory requirements, corporations are increasingly turning to debt capital markets. Having said this, the extent of this trend differs sub-stantially between the core and peripheral euro-area economies.
High investor demand due to search for yield sentiment is fuelling corporate bond issuance. While the fact that banks are paying roughly the same or even higher rates for their refinancing than their customers no doubt has pushed corporate debt markets, the main driver for the high issuance volumes seems to be investors’ search for yield in a low interest rate environment. As sovereign bonds are offering historically low yields, corporate bonds have turned into a significant investment alternative in the present market conditions.
In the era of Knightian uncertainty and high liquidity, strong growth in corporate bond market calls for a closer examination of potential overheating. As yields are falling across all rating classes, HY corporate bonds in particular are looking increasingly expensive in the eyes of many observers. If the strong demand were to sour as a result of a recession or an increase in sovereign bond yields, HY corporations in particular could find access to funding constrained and consequently default probabilities/numbers would increase..