BANKS LOOSE DOMINANCE IN LOANS TO COMPANIES / THE FINANCIAL TIMES ( RECOMMENDED READING )

Banks lose dominance in loans to companies

By Anousha Sakoui

Published: September 22 2010 22:23

The banking crisis has led to a structural shift in the way UK companies fund themselves, with a greater share of funding coming from bond markets, according to a report from Standard & Poor’s.

Bond markets have replaced banks to become the main provider of new debt financing on a net basis since the third quarter of 2008, according to the report, which is based on Bank of England data.

While UK financial institutions have reduced their net lending to UK companies by £59.1bn since September 2008, when Lehman Brothers collapsed, corporate bond issuance by UK businesses had increased by £22.2bn by the end of the second quarter of 2010.

While the problems in finding new finance in the wake of Lehman’s collapse were responsible for the initial move to the bond markets, analysts at S&P believe that banking reforms and the new Basel III rules will further restrict bank lending and turn the trend to a longer-term shift.

Companies are also being attracted to the bond markets by lower prices, with the cost of bank financing rising while corporate bond yields are at record lows.

“Even if banks remain the main source of debt financing for relationship clients and mid-size to smaller companies, we nevertheless expect that the changed banking environment will make the provision of corporate credit more restrictive and expensive than before the financial crisis,” said Paul Watters, analyst at S&P.

“The net result . . . is that corporate treasurers will increasingly view the capital markets as an attractive source of liquidity for term financing.”

Thomas Cook and Manchester United are among the companies that issued bonds for the first time.

“What we have seen since [September 2008] is UK companies coming to the bond market for first time, many using the bond market to provide them with term capital so that they can reduce the size of their bank facilities that are coming up for renewal,” said Jeremy Froud of Barclays Capital.

“The shift would seem to be a longer-term one as companies are not just being opportunistic but are strategically accessing the capital markets to diversify funding sources. “

Banks still dominate lending. In the UK, bank loans account for 76 per cent of corporate debt finance.

“We believe the financial turmoil of the past two years has provoked a rethink, not just by European regulators, but also by companies themselves, questioning whether their traditional reliance on bank debt finance could undermine their economic stability and growth,” said Mr Watters.

Copyright The Financial Times Limited 2010.