BIS国际清算银行-Bonds-and-syndicated-loans-during-the-Covid-19-crisis_-decoupled-again_9页_683kb

BIS Bulletin Summary: Bonds and Syndicated Loans During the Covid-19 Crisis: Decoupled Again?

Core Content

This BIS Bulletin analyzes the behavior of non-financial firms in global debt markets during the early stages of the Covid-19 crisis, comparing it with the Great Financial Crisis (GFC). It highlights the divergence between bond and syndicated loan markets, focusing on the role of large firms in accessing credit.

Key Takeaways

• Borrowing Surge: Non-financial firms increased borrowing significantly during the pandemic, primarily through bond issuance, while syndicated loan originations remained subdued.
• Market Decoupling: The bond and syndicated loan markets decoupled, similar to the GFC, due to the strain on the syndicated loan market.
• Large Firms Advantage: Large firms (revenues > $1 billion) had better access to bond markets and used this to raise capital, increasing their share of borrowing.
• Liquidity and Precautionary Motives: Large firms used new borrowing to address liquidity shortfalls and build precautionary buffers, despite not facing more severe revenue shocks than mid-sized firms.
• Strains in Syndicated Loan Market: Banks, CLOs, and end investors faced challenges, including increased credit risk, regulatory limits, and investor risk aversion, which limited syndicated loan availability.

Introduction

During the pandemic, non-financial firms turned to debt markets for liquidity, with central banks supporting both bond and loan markets. However, the surge in borrowing was uneven, with bond markets leading the way while syndicated loans lagged. This decoupling is reminiscent of the GFC, but the current crisis did not originate in the banking sector, highlighting the resilience of market-based finance.

Drivers of Strains in the Syndicated Loan Market

• Bank Cautiousness: Banks became more cautious due to reduced lending capacity and increased credit risk, leading to higher loan loss provisions.
• CLO Issuance Decline: Collateralised loan obligation (CLO) issuance slowed, reducing liquidity in the secondary market.
• Investor Aversion: Loan funds and exchange-traded funds experienced outflows, and loan fund indices fell more sharply than bond fund indices, indicating investor risk aversion.
• Regulatory and Risk Limits: Banks approached regulatory and internal risk management limits due to increased exposure and risk weights.

Large Firms Capitalise on Bond Market Access

• Larger Borrowers: The average size of borrowers in debt markets doubled compared to the start of the crisis, with large firms dominating.
• Prevalence of Large Firms: By late May 2020, over 70% of all borrowers were large firms, a level not seen in a decade.
• Bond Issuance Experience: Large firms had more experience in bond markets, enabling them to issue bonds more easily. They had established relationships with underwriters and lower informational asymmetries.
• Lower Fixed Costs: Large firms had already incurred the fixed costs of bond issuance, making it more accessible during the crisis.

Liquidity Shortfalls and Credit Quality

• Sectoral Distribution: Large firms were less concentrated in sectors hardest hit by the crisis, suggesting similar revenue shocks to mid-sized firms.
• Refinancing Needs: Large firms had lower near-term refinancing needs due to longer average debt maturities and a smaller share of debt maturing in 2020.
• Sticky Expenses: Lower pre-crisis labour expense-to-revenue ratios indicate that large firms faced less pressure on liquidity compared to mid-sized firms.
• Credit Quality: The Altman Z-score suggests that large firms had only marginally better financial soundness than mid-sized firms.

Rationale for Borrowing by Large Firms

• Liquidity Needs: Large firms used borrowing to meet short-term liquidity shortfalls, driven by plummeting revenues.
• Precautionary Buffers: Some indicators suggest that large firms also built precautionary liquidity buffers through new borrowing, particularly given their historically lower cash reserves.
• Flexible Use of Funds: A significant portion of new borrowing was not earmarked for specific purposes, indicating a preference for financial flexibility.
• Longer Tenors: Increased average tenors of debt issuances suggest firms aimed to avoid near-term refinancing needs.

How Firms Used Borrowing Proceeds

• Cash Buffers: Large firms used proceeds to increase their cash buffers, as reflected by higher cash-to-asset ratios.
• Liquidity Trends: This trend mirrors that observed after the GFC, where firms similarly increased liquidity reserves.
• Flexible Funding: The flexible use of proceeds and longer tenors indicate a shift towards precautionary motives rather than specific investment needs.

Conclusion

The pandemic led to a significant shift in corporate borrowing, with large firms benefiting more from the bond market boom. This trend, while reminiscent of the GFC, was driven by different factors, such as the role of central banks and the structural changes in financial systems. The dominance of large firms in borrowing may have implications for mid-sized firms, which also have creditworthy profiles but face greater challenges in accessing credit.

References

• Adrian, T, P Colla, H S Shin (2012): "Which financial frictions? Parsing the evidence from the financial crisis of 2007-09"
• Banerjee, R, A Illes, E Kharroubi and José María Serena (2020): "Covid-19 and corporate sector liquidity"
• Board of Governors of the Federal Reserve System (2020): "Syndicated Loan Portfolios of Financial Institutions"
• Cavallino, P and F De Fiore (2020): "Central banks' response to Covid-19 in advanced economies"
• Claessens, S (2016): "Regulation and structural change in financial systems"
• Diamond, D (1984): "Financial intermediation and delegated monitoring"
• Krishnaswami, S, P Spindt and V Subramaniam (1999): "Information asymmetry, monitoring, and the placement structure of corporate debt"

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