Andreas Dombret, a member of the executive board of
the Bundesbank, said the sale of debt by companies was “limited in
scope” but a “welcome response” to tighter lending by banks.
So Peter H. Leibold was breaking from the norm last year when he decided
to finance the expansion of his company, which makes wood pellets for
heating and energy generation, by selling corporate bonds. The company,
German Pellets, raised more than 80 million euros ($102 million).
Now he is a convert.
“The advantage of a bond is that you can raise a large amount from a
completely different group of investors,” said Mr. Leibold, the founder
and chief executive of the company, which is based in Wismar, on the
coast in northern Germany.
Corporate bonds — essentially, interest-bearing i.o.u.’s that companies
sell to whomever is willing to buy — have long been an essential
borrowing tool for companies in the United States.
But in Europe, borrowing from banks, whether local ones or big
multinationals, has traditionally been the preferred way to raise money.
Just 9 percent of corporate credit in the euro zone comes from debt
markets, according to the Bundesbank, Germany’s central bank, compared
with 64 percent in the United States.
But as the euro zone’s financial crisis has forced many banks to hoard
cash and curtail lending, more European companies are turning to bond
markets. If the trend continues, it could not only begin reversing the
Continent’s longstanding preference for bank credit, but also make the
region less prone to banking crises.
There might be resistance, however, from European regulators, who regard
such borrowing as a form of shadow banking that they cannot control. In
addition, bank lobbyists might fight what they see as competition.
“People are afraid of a financial system not based on what they know,
which is financial intermediation by banks,” said Nicolas Véron, a
senior fellow at Bruegel, a research group in Brussels.
The fears are not unfounded. The propensity of banks in the United
States to turn loans into securities that can be sold to investors
arguably helped create the subprime mortgage crisis.
But later on, there was an upside: the practice meant that the fates of
companies in the United States were less coupled to those of banks. Not
so in Europe, where the problems of credit institutions remain a grave
threat to the rest of the economy.
“Euro-area firms are particularly vulnerable to reduction in bank credit
because of their greater reliance on banks for funding,” the
International Monetary Fund said in a report last month.
Companies’ tapping of euro zone bond markets has surged this year, more
than doubling to $107 billion in the first quarter, according to
Dealogic, a data provider. For the first time since 2009, bond issues
surpassed syndicated bank loans as a source of financing for larger
companies.
When even large European banks are cutting back on risk, bond issues
enable companies to raise money from investors outside the euro zone who
are less affected by the crisis.
It remains unclear, though, to what extent debt markets can fill the
vacuum left by troubled European banks. Bond markets might not help the
thousands of smaller companies that form the backbone of the euro zone
economy but are too small to attract investors’ attention.
“The corporate sector in Europe still comprises mostly small- and
medium-sized enterprises that will continue to rely on bank loans,”
Andreas Dombret, a member of the executive board of the Bundesbank, said
in an e-mail.
The countries that need credit most desperately are also the ones with
the highest proportion of small firms least able to gain access to debt
markets. Companies with 50 employees or fewer employ 68 percent of the
work force in Italy and 62 percent in Spain, according to Goldman Sachs.
Those figures compare with 40 percent in Germany.
“For smaller firms in particular, the fixed costs can simply be too
high, rendering a bond issuance uneconomical under all circumstances,”
Dirk Schumacher, an economist at Goldman Sachs in Frankfurt, wrote in a
report last month.
But the experience of German Pellets, which had sales of 275 million
euros ($350 million) last year and has 500 employees, suggests that
bonds could be an alternative for at least some midsize companies.
Mr. Leibold said that it initially had taken some effort to explain to
investors why wood pellets were an interesting business. The pellets are
a source of renewable energy and are cheaper than oil or natural gas, he told them.
Mr. Leibold, who founded the company in 2005 after he saw wood pellets
being made by small operations in Sweden and realized there was an
opening for a mass producer, says his sales are rising — even in Greece —
as people and companies look to cut costs.
Eventually, investors came around. The company used the money it raised
to make several acquisitions and build new manufacturing plants,
including one in Woodville, Tex., that is to employ 250 people when it
is completed later this year.
German Pellets also continues to draw on traditional bank financing, Mr.
Leibold said. But the bond market provides a diversity of fund sources,
without the drawbacks of a stock listing. Like many European
entrepreneurs, Mr. Leibold expresses an aversion to going public.
The company reflects his spirit and that of his colleagues, he said.
“If German Pellets was listed on an exchange, it would change the company from that day on,” he said.
While there has been no broad effort to curtail debt issues, regulators
at the European and national levels are now scrutinizing so-called
shadow banking. That is a broad category that includes hedge funds and
other activities outside the traditional banking system, as well as
corporate bond issuance.
In practice, corporate debt is typically handled within the banking
system, with banks earning hefty fees for marketing the bonds. But
because the business is dominated by large investment banks, the concern
by some regulators is that smaller institutions have trouble competing
in that market and could lose revenue as a result.
Mr. Véron of Bruegel said central bankers might also worry that a shift
from traditional banking could make it harder to control interest rates —
their main policy tool.
“The European Central Bank
sees a need for more credit,” he said. “At the same time they are
concerned about losing the monetary policy transmission channel.”
For all that, though, officials do not seem to be terribly concerned.
Mr. Dombret of the Bundesbank said that the sale of debt by companies
was “limited in scope” and a “rational and welcome response” by
companies to tighter lending by banks in many parts of the euro zone.
Risks that banks will be bypassed “seem to be rather low at this stage,”
he said, but he added that the Bundesbank would “continue to monitor
this area.”
Mr. Leibold of German Pellets, for his part, said he was happy with his
bond experience and planned to tap debt markets again. But he was not
sure bonds would work for all companies. “You need a story for investors,” he said.
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