One of the biggest differences between the US and European financial systems is where companies get their funding. Most US corporate debt is in the form of bonds, while in Europe banks dominate.
But since the financial crisis there’s been a slow-but-sure shift in Europe, with more and more companies tapping capital markets rather than their usual club of domestic banks.
Here’s the latest presentation from Apollo’s Torsten Sløk. It’s mostly about the economic outlook, hard vs soft landing etc etc. It’s all worth perusing, but two charts towards the end caught Alphaville’s eye.
Here’s the composition of US corporate funding. Bank loans have shrunk further from 39 per cent of the total in 2008 to 23 per cent at the end of last year:
(Also note that the US corporate bond market has become junkier. While the overall share of sub-investment grade high yield paper has stayed roughly steady, the share of BBB-rated bonds has doubled over the period.)
In Europe, bank loans have shrunk from 86 per cent of overall corporate debt to 77 per cent, with the bond market’s share going from 13 per cent to 22 per cent.
It’s actually a little surprising that European banks remain quite this dominant. Alphaville would have hazarded a guess that we were probably in the 60-70 per cent range rather than 70-80 per cent. The ECB said last year that the bond market’s share had crept up to about 30 per cent.
But whatever the exact breakdown, the direction is clear: European banks will probably always play a bigger part than they do in the US, but their role is going to continue to contract over the next decade as well.
Remember, this is a development that banks, borrowers, regulators and politicians actually all want, to varying degrees. Nurturing a bigger and better corporate bond market is one of the main planks of the EU’s capital markets union project.
After an understandably sluggish 2022, the European corporate bond market has also seen a flurry of deals this year, with the chunkiest first-quarter sales volume since 2009, according to PwC.
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