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March 26 (Reuters) - (The following statement was released by the rating agency)
Non-financial corporate bonds now make up a much larger part of the overall larger universe of outstanding corporate bonds compared with before the financial crisis in both EMEA and the US, Fitch Ratings says in a new quarterly report.
Total combined corporate bonds outstanding in EMEA and the US have increased by almost one-third since 2006 to reach USD10.3trn at end-2013. The growth was driven by non-financial corporate bonds which more than doubled to USD6trn, now accounting for almost 60% of the universe.
The fastest growing sector was EMEA non-financials, with 2013 issuance at 2.5x the 2006 level, illustrating the impact of increased disintermediation as companies switch from loans to bonds. By contrast, the amount of bonds issued by financial institutions (FI) have shrunk in both the US and EMEA, reflecting lower funding needs by banks focused on post-crisis deleveraging. If covered bonds - which are important for EMEA banks - are included, total EMEA FI bonds outstanding have risen by a modest 14%.
Nevertheless, the sector mix differs by region. Financial bonds account for just over half the total in EMEA but less than one-third in the US. In terms of relative regional scale, total EMEA bonds outstanding of USD5.6trn outstripped the US amount by 18% in 2013. This figure would rise to 74% if covered bonds were included. Covered bonds, which benefit from pools of collateral but also recourse to the issuing institution, accounted for almost half EMEA financials bonds outstanding at end-2013.
By contrast, the rating profile of the universes in the two regions is broadly similar if excluding the large portion of ‘AAA’ rated EMEA financial bonds consisting of covered bonds. For non-financials, the more developed high yield market in the US is evident in the 28% non-investment grade share of bonds outstanding, with the EMEA equivalent being just 21%.
Rating pressure has been modest in recent quarters, with the par value share of outstanding bonds downgraded running at low single digits for both the financial and non-financial sectors in the two regions. However, rating compression as a result of negative rating activity since the crisis is evident in the rising share of ‘BBB’-rated issuance. Financials bond issuance in this rating category has risen sharply since 2006 - by four times in the US and by 10 times in EMEA. Rating downgrades of banks have been most severe in the eurozone.
Negative rating pressure in 2014 will likely focus on European banks, which face a regulation-induced reduction in state support. Issuance by this segment will remain limited due to continued deleveraging and a weak economy. EMEA non-financial corporates will continue to take advantage of low rates to pre-finance. US bank issuance should continue to rebound with more robust US growth. Refinancing activity is still prominent but closer to exhaustion across US non-financials. A stronger macro backdrop is a positive catalyst for rating activity in this segment but likely offset by increased shareholder-oriented transactions.
The full report, “Corporate Bond Comparator 1Q14”, is available at www.fitchratings.com or by clicking the link below. A video summary is also available at
Link to Fitch Ratings’ Report: Corporate Bond Comparator 1Q14