While 2009 saw record issuance in the European bond market, the loan business contracted sharply as banks reined in lending following the financial crisis. And with banks likely to be forced to hold significantly more capital as part of the regulatory shake-up of the industry, some commentators believe there will be a permanent shift by European corporates away from loans to the bond market.
According to Dealogic, European bond issuance reached €557.2 billion in 2009 compared with €338.4 billion of loans, the first time bond market volumes have exceeded loans.
However, Mike Johnstone, director of the Loan Market Association, believes loans still offer flexibility to borrowers. “There certainly is a place for the loan product. It provides flexibility that you don’t get in the bond market. The statistics tell their own story, but we’re quite confident there is still a place for the loan product,” he says.
Johnstone believes that when corporates want to transact large deals in relative anonymity, loans again hold a trump card. “The loan market is still a very private market. In the event of funding a takeover, if a company wants privacy and secrecy the loan market offers a lot of benefits,” he says.
There are three main reasons why the bond market usurped its loan equivalent last year: it was cheaper, and it gave issuers the ability to raise more money and with longer tenors. What it doesn’t yet offer, according to Johnstone, is the same level of tailoring of deal structures to fit investors’ needs.
“With loans, it is easier to come up with a structure that’s got one tranche that appeals to the US investor, another tranche that appeals to the European and so on. It will always have an advantage in offering a high degree of structuring to meet the needs of investors,” he says.