Wary Banks risk crimp­ing growth in lend­ing squeeze

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BRUSSELS

Europe’s cor­po­rate bond mar­ket is shrink­ing as re­demp­tions out­strip is­suance, banks bor­row and lend less, and com­pa­nies stock­pile cash rather than in­vest in their busi­nesses.

Banks have sold about 335 bil­lion eu­ros ($427 bil­lion) of bonds in the com­mon cur­rency and pounds this year, down from 443 bil­lion eu­ros last year, 503 bil­lion eu­ros the year be­fore and a record 671 bil­lion eu­ros in 2009. Banks cut their lend­ing to euro-area com­pa­nies by 45 bil­lion eu­ros in the third quar­ter from a year ear­lier, ac­cord­ing to the Euro­pean Cen­tral Bank.

“It’s not clear whether the lack of bank lend­ing is a re­flec­tion of bro­ken banks or more a prob­lem of dire eco­nomic out­looks for cor­po­rates,” said David Watts, a strate­gist at Cred­itSights Inc. in Lon­don. “Com­pa­nies that are able to do so are tap­ping the bond mar­kets. The rest ei­ther can’t or don’t want to bor­row.”

ECB Pres­i­dent Mario Draghi vowed in July to “do what­ever it takes” to pre­serve the euro as the sov­er­eign debt cri­sis crimps economies and un­der­mines com­pany and con­sumer con­fi­dence. Asked yes­ter­day about the avail­abil­ity of credit for small- and medi­um­sized com­pa­nies, Draghi said: “Are we sat­is­fied with the fi­nan­cial con­di­tions? No, we’re not at all sat­is­fied.”

To­tal cor­po­rate bond is­suance in eu­ros and pounds has reached 633 bil­lion eu­ros this year, up from 583 bil­lion eu­ros at this point last year and com­pared with 652 bil­lion eu­ros for all of 2011, data com­piled by Bloomberg show. The value of banks’ out­stand­ing bonds is about $632 bil­lion, down 8 per­cent from the end of last year and a slide of more than 12 per­cent from a record reached in July 2011, ac­cord­ing to Bank of Amer­ica Mer­rill Lynch’s EUR Cor­po­rates, Bank­ing in­dex.

Trea­sur­ers of large com­pa­nies, scarred by 2008’s credit squeeze, are re­fi­nanc­ing at yields driven down by cen­tral banks cut­ting in­ter­est rates close to zero. That cash isn’t flow­ing into the econ­omy. Non-fi­nan­cial mem­bers of the Stoxx Europe 600 In­dex hold 577 bil- lion eu­ros of cash, up from 570 bil­lion eu­ros in 2011 and the 345 bil­lion-euro av­er­age of the three pre-cri­sis years ended in 2006, Bloomberg data show.

“Com­pa­nies aren’t pur­su­ing new in­vest­ments, they’re not hir­ing, and they’re let­ting plants de­te­ri­o­rate be­cause they don’t see op­por­tu­ni­ties,” said Derek Hynes, a Lon­don-based port­fo­lio man­ager at ECM As­set Man­age­ment Ltd., which runs about $9.5 bil­lion in fixed in­come. “The im­pli­ca­tions for the macro econ­omy aren’t good. They have to get back to growth, to merg­ers and, most im­por­tantly, to hir­ing.” Yields on Span­ish 10year bonds, which peaked at 7.75 per­cent on July 25, have fallen to about 5.89 per­cent, about 452 ba­sis points more than sim­i­lar-ma­tu­rity Ger­man debt. Ital­ian 10- year bonds yield 5.04 per­cent, down from a peak of 6.71 per­cent, also on July 25, and now pay a 361 ba­sis-point pre­mium to bunds.

“Draghi has com­pressed spreads from as­tro­nom­i­cally high lev­els to just very high lev­els,” said Richard Barwell, Euro­pean econ­o­mist at Royal Bank of Scot­land Group Plc in Lon­don. “The en­vi­ron­ment is very un­cer­tain, so if you don’t need to in­vest, you don’t. You won’t have stel­lar re­turns but at least you won’t die.”

Among banks that have sold bonds are In­tesa San­paolo SpA (ISP), Italy’s sec­ond-largest bank, which raised 1.71 bil­lion eu­ros in se­nior un­se­cured 4 per­cent bonds due 2017 on Nov. 7. UniCredit SpA (UCG), the big­gest Ital­ian bank, was able to is­sue 1.25 bil­lion eu­ros of 10-year 6.95 per­cent sub­or­di­nated bonds on Oct. 22.

That was a “big event” be­cause it shows how the cost of do­ing those deals has fallen, ac­cord­ing to Suki Mann, a credit strate­gist at So­ci­ete Gen­erale SA in Lon­don.

“Banks be­ing able to do their own is­suance has helped,” said An­drew Lim, a bank­ing an­a­lyst at Espir­ito Santo In­vest­ment Bank in Lon­don. “Even so, the trans­mis­sion mech­a­nism isn’t work­ing ef­fec­tively for the real econ­omy. Draghi has taken the tail risk of a euro break-up off the ta­ble, but not much else.”

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