Bloomberg News

Junk Issuers Deserted by Banks Boost Bonds Six-Fold, Lazard Says

November 25, 2011

Nov. 24 (Bloomberg) -- Junk-rated borrowers in Europe have increased their reliance on the bond market six-fold since 2007 as loans become scarcer and costlier, according to Lazard Ltd.

Bonds provided 29 percent of funding to high-yield companies over the last twelve months compared to 5 percent in 2007. Investment-grade rated firms almost doubled borrowing in the bond market to 23 percent from 14 percent.

“Borrowers that can access the bond markets are doing so,” Michael Grayer, managing director and head of debt advisory at Lazard in London said at a briefing. “There has been a shift.”

Companies are replacing loans with bonds as regulations designed to limit losses in a financial crisis prompt banks to cull loans to riskier issuers. Lenders have pledged to cut assets by more than 775 billion euros ($1.03 trillion) within two years to meet a 9 percent core capital ratio earlier than planned and buffer losses on sovereign debt.

In the U.S., investment-grade borrowers rely on bonds for as much as 90 percent of their funding, according to Lazard. High-yield firms borrow 50 to 75 percent from bonds. The debt is typically rated below Baa3 by Moody’s Investors Service and less than BBB- by Standard & Poor’s.

Loans to investment-grade borrowers in Europe pay an average of 91.6 basis points more than benchmark rates, up from 84.4 basis points during the first six months of 2011, according to data compiled by Bloomberg. The interest margin for leveraged buyouts has increased to 434 basis points from 419.8.

Basel Curbs

The Basel Committee on Banking Supervision made it more expensive for banks to lend to riskier borrowers last year by raising the cost of the capital they’re required to set aside against the loans. The new rules follow regulations known as Basel II, which required lenders to allocate more capital against higher-risk loans.

Issuance of high-yield bonds in Europe rose to a record $84 billion this year as two years of record-low interest rates encouraged investors to reach down the credit curve.

More companies are seeking alternative sources of funding such as private placements, asset-based loans, retail and high yield bonds to compensate for a 50 percent attrition rate of bank lenders in recent deals, said Ranjit Munro, managing director, finance and ratings advisory at Lazards.

“If I look back on the last four or five U.K. corporate refinances I have advised on, about 50 percent of the original syndicate does not feature in the new syndicate,” said Ranjit Munro, managing director, finance and ratings advisory at Lazards. “That shows there are stresses in the market.”

--Editors: Cecile Gutscher, Michael Shanahan

To contact the reporter on this story: Louise Meeson in London on

To contact the editor responsible for this story: Faris Khan at

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