Bonds vs. loans: Giant bank loans were a hallmark of the credit boom. Banks wanted to lend, and bankers loved the idea of splitting big loans. Risk could be diversified and there was money to be made trading and playing loans against derivatives. But the loan business is a casualty of the bust — and bond investors are moving in.
Non-financial companies have raised more money in bond markets than through syndicated loans so far in 2009 — the first time on record this has happened, according to data provider Dealogic. Global syndicated loan volume for these companies has shrunk from $4.2 trillion in the peak year, 2007, to $1.1 trillion in the first nine months of this year. Bond issuance, by contrast, has increased to $1.3 trillion — hardly replacing all the lost loans, but still turning on its head the pattern of a few years ago.
From 2003 to 2007, the worldwide volume of new syndicated loans for non-financial companies grew at a 28 per cent annual clip. Over the same period, bond issuance expanded at only a 6 per cent annual rate. By 2007, loan issuance was nearly five times as large as bond issuance.
Then the bubble burst, loans went bad, banks ran short of capital and syndicating big new loans started to look like a luxury. Meanwhile collateralised loan obligations, vehicles that were designed to repackage sometimes risky loans and provided a big chunk of boom-time loan demand, also withdrew to lick their wounds.
Other kinds of investors didn’t suffer quite so badly. With bond yields attractive, it makes sense that they’ve stepped up. In the nine months to September, total global bond issuance was 47 per cent higher than for the whole of 2008. In much of the world, companies have traditionally been reluctant to issue bonds, which can be expensive and inflexible. But when they need cash and banks are out of action, these disadvantages don’t seem so troublesome.
When banks are more strongly capitalised, the syndicated loan business will grow again. But as with so many practices that flourished a few years ago, a great deal of chaff got mixed in with the wheat. The credit crunch has provided a useful sort of winnowing.
