Comments on the session
“From a Banking to a Financial Union”
Lúcio Vinhas de Souza, Sovereign Chief Economist
Banco de Portugal, Lisbon, 5 September 2014
Financing corporates in the EU
» EU/EA much more reliant on bank financing than other
markets, notably the US
» By necessity, banks have reduced leverage and lending
levels, while leading corporates to increasingly seek
capital markets funding as needed
» However, corporate dependence on banks for funding
remains high: debt securities comprised just over €1.1
trillion or 80% of long-term financing for EA corporates as
of 4Q 2013 (compared to 84% at the beginning of 2005)
Banco de Portugal, Lisbon, 5 September 2014
European Economies Far More Reliant on Bank Lending
than US
Source: Haver
Banco de Portugal, Lisbon, 5 September 2014
Financing of Euro Area Non-Financial Corporations (€
bn)
Source: ECB
Banco de Portugal, Lisbon, 5 September 2014
Securitisation constrained
» Growth in securitization markets – including SME ABS
and collateralized loan obligations - improve banks‘
capacity to originate lending to corporates by helping them
reduce the accumulation of risk on their balance sheet
» However, European issuance a) remains muted and b)
continues to be for the most part retained by banks rather
than placed with third party investors
» One of the reasons for this is that regulatory rules for
issuers and investors continue to hinder growth for
European securitizations
Banco de Portugal, Lisbon, 5 September 2014
European Structured Finance Issuance
Securitizations Levels Still Very Low (€ bn)
–
SME
Source: Moody’s Investors Service
Banco de Portugal, Lisbon, 5 September 2014
Securitisation growing, from a low basis
» A variety of initiatives in the US and EU intend to support
SME lending and transform SME-backed securities into a
viable securitization market
» For example, the ECB has just announced an ABS
purchase program (‗simple and transparent‘ ABS, where
underlying assets consist of claims against the euro area
non-financial private sector, more details still to follow
later)
Banco de Portugal, Lisbon, 5 September 2014
Some percieved constraints to the market’s expansion
» EU securitizations performed well in the crisis, with low default
rates, also support market‘s expansion (less than 0.5% of all
EMEA ABS and RMBS notes rated by Moody‘s had a principal
loss). However, uncertainty on details of the regulatory
framework for securitization makes investors cautions
» Capital requirements for structured finance investments are
high relative to those in other debt instruments of similar risk,
such as covered bonds, leading to a market sentiment that they
are a barrier to the market‘s expansion
» Also, less traded that what one could expect: for example,
much recent ABS issuance has been retained by issuers, partly
for use as collateral in ECB‘s refinancing operations
» Basel III and the AQR also act as constraints to leverage
Banco de Portugal, Lisbon, 5 September 2014
Outstanding securitisations and bank loans to NFCs (Q2
2014, € bn)
Source: SIFMA and ECB
Banco de Portugal, Lisbon, 5 September 2014
Securitization Issued During 2013 (€ bn)
Source: SIFMA
Banco de Portugal, Lisbon, 5 September 2014
Low lending growth, also limited expansion of other
funding sources
» Net new bank lending has been lackluster, or even
negative, in most quarters since the financial crisis
» While the substitution effect of bank loans for other
sources of funding has provided a stimulus for the bond
markets, the equity markets have also been a source of
funding, as evidenced by the growing number of IPO
activity in recent quarters
Banco de Portugal, Lisbon, 5 September 2014
Financing of Euro Area Non-Financial Corporations:
Four-quarter Moving Sums of Transactions (€ bn)
Source: ECB
Banco de Portugal, Lisbon, 5 September 2014
However, EA periphery share of issuance growing......
» The bulk of corporate debt issuance still emanates from
larger countries such as Germany, France and the UK.
However, the growth in number of new issuers has been
more evident in stressed EA countries like Spain and Italy
» As a matter of fact, high yield-issuance in 2013 in the five
euro area periphery countries (i.e. Italy, Spain, Portugal,
Greece and Ireland) doubled to $24 billion, growing to
27% of total EU issuance (parallel to a decreasing
average rating and credit quality of new issuers)
Banco de Portugal, Lisbon, 5 September 2014
Gross Corporate Debt Issuance (€ bn)
Source: ECB
Banco de Portugal, Lisbon, 5 September 2014
High-yield Issuance from EA Periphery by Corporate
Family Rating (CFR)
Source: Moody’s Investors Service
Banco de Portugal, Lisbon, 5 September 2014
Accommodating market conditions...
» (very) Low interest rates have enabled some corporates to
further leverage themselves through high yield bond
issuance
» The leverage (measured as Moody‘s Adjusted
Debt/EBITDA) of EMEA speculative-grade companies
newly-rated in 2013 was on average the highest since
2010, rising to 5.3x in 2013 from 4.8x in 2011
» The significant decline in market yields at which high yield
companies are pricing new issuance, as well as the
deteriorating credit quality metrics, suggest a) that bond
markets are currently relatively accommodating and b)
that economic trends remain difficult
Banco de Portugal, Lisbon, 5 September 2014
Median Debt/EBITDA of First Time
Companies at Rating Assignment
Rated
EMEA
Source: Moody’s Investors Service
Banco de Portugal, Lisbon, 5 September 2014
... even to spec grade issuers
» New and smaller entrants to the bond markets likely
affected by constrained bank lending, while finding the
bond markets to be accessible and potentially less
expensive at this point in time
» Yield-to-maturity at issuance for Ba-rated issuers in
Europe has fallen from about 7.5% in 2010 to 5.0% in
2Q14, a fall not supported by stronger credit quality
» In comparison, the 5+ year average new corporate loan
rate (at all credit grade levels) by European financial
institutions has fallen over the last three years and now is
between 3% and 4%
Banco de Portugal, Lisbon, 5 September 2014
EMEA High Yield YTM At Issuance*
*Issuance rating by Moody’s
Source: Moody’s Investors Service
Banco de Portugal, Lisbon, 5 September 2014
A coda on “shadow banks”
» ―Shadow banking‖ can be broadly described as any credit
intermediation activity involving entities and/or activities
outside the normally regulated regular banking system
» A implication of this definition, given the globally different
regulatory footprints (or, in other terms, different
jurisdictions regulate different institutions and activities as
part –or not- of the formal bank systems), is that what is
classified as ―shadow banking‖ differs between countries
Banco de Portugal, Lisbon, 5 September 2014
Do they represent a danger to the EA/EU?
» Well, let‘s look at the data
» Shadow banks in the EA, on average, are less than a third
of relative size to ―traditional‖ banks as in the US
» And, without NL, that would be less than a sixth
» Does the larger relative size of the shadow bank system in
the US represents a problem? Does the smaller one in the
EA? Chapéus há muitos!
Banco de Portugal, Lisbon, 5 September 2014
Into the Light: Non-bank Financial Intermediaries as a %
of GDP (2012)
900
200
800
180
160
700
140
600
120
500
100
400
80
300
60
200
40
100
20
0
0
UK
NL
FR
DE
Shadow banks
ES
IT
Banks
EU (avg) EA (avg)
US
CH
TR
RU
Shadow banks/banks (%, right scale)
Source: FSB, 2013
Banco de Portugal, Lisbon, 5 September 2014
Thanks for your
attention!
Banco de Portugal, Lisbon, 5 September 2014
Lúcio Vinhas de Souza
Managing Director-Sovereign Chief Economist
1.212.553.1117 tel
1.212.298.6458 fax
Lucio.VinhasdeSouza@moodys.com
Banco de Portugal, Lisbon, 5 September 2014
Some Related Moody’s Research
» Euro Area Contraction in Corporate Lending Is Credit
Negative, April 2014 (167342)
» Italian Corporate Bond Market: Improving Macroeconomic
Conditions, Low Interest Rates and Ongoing Bank
Disintermediation Will Fuel Issuance for Next 12-18
Months, June 2014 (172123)
» The Revival of the European Securitization Market,
Overcoming the Barriers, June 2014 (SF370538)
» European ABS and RMBS: Historical Resilience Will
Continue Beyond 2014, June 2014 (SF367681)
» Newly-Rated EMEA High-Yield Companies: Credit Quality
Likely to Weaken in 2014, April 2014 (168791)
Banco de Portugal, Lisbon, 5 September 2014
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