Despite the turmoil of the last few days, for most of the fourth quarter, corporate borrowers have been in a strong place to issue and refinance debt. They may not have wanted to use it, given low growth expectations in Europe – but they should do so, and soon.
While Europe's politicians and bureaucrats have talked up Europe's movement towards a capital markets model more like the US (20% banks and the rest through bonds and private placements), figures for loan market volumes show that banks in peripheral countries have mounted a rearguard action.
Since June last year, the European Central Bank’s TLTRO programmes have made it easier for domestic banks in peripheral countries to lend. This cheap funding, available for up to four years and with early repayment possible, has chiefly benefitted smaller corporate borrowers that don’t have ready access to international lenders and might otherwise have gone to non-bank private and public debt markets.
Italian banks have been among the biggest users of TLTRO – accounting for as much as a third of some of the eight scheduled programmes.
Despite all the talk of Italian companies having little to do in the capital markets following their rebalancing drive from 2010 to 2014, Italian loan volumes have stayed steady and at a high level over the last three years, with the number of individual deals on the rise. There has been $42.5bn of Italian corporate loans so far in 2015, according to Dealogic, down from the $52bn high water mark of recent years in 2014 – but with the same number of transactions, at 85.
Against this, Italian corporate private placement volumes have noticeably slumped. There have been only 10 deals this year, for $1.2bn in total. That’s down from $1.9bn last year and $2bn in 2013.
It’s not hard to connect the dots. Thanks to TLTRO the spread differential between the terms banks can offer versus what borrowers would have to pay in the bond market has given a clear competitive advantage. This has even become the case for some longer dated loans, with lines of as much as seven years having been touted, encroaching again on the favoured territory of bonds and PP.
But the bad news is that by June the final two TLTRO programmes will have been completed. The maturities of the first eight programmes will also be down to two years by then.
This could bring the days of cheap lending to a close, even if short end rates stay on (or below) the floor. The TLTRO could be extended, but it wouldn't be wise to count on it.
The bite of reality could be compounded if peripheral banks, basking behind the magic shield of TRTLO, have not been correctly factoring in the true cost of capital they need to set against such assets.
These revelations could well herald the return of peripheral corporate borrowers to the bond and PP market. Given the volatility in the capital markets now, and ahead in 2016, the message is clear: ride the bank sugar rush while it lasts, because the comedown could be cruel.