Alternatives to corporate loans are disappearing

1 june 2018

As inflation is slowing down corporate borrowers are changing their attitudes towards debt instruments: now private companies are increasingly choosing to simply borrow money from banks over issuing bands, Analytical Center experts write in their new overview titled Corporate Bonds for Private Business: Any Growth Prospects?

Improving macro-economic conditions, including the slowing-down of inflation, has allowed corporations and banks to increase their borrowing, but the falling interest rates on bank loans made the issuance of bonds a less attractive proposition for private businesses (except for really big corporations), the review concludes. The interest rates on bank loans issued to non-financial organizations have fallen to 8.5-9% while banks have plenty of liquidity allowing them ‘to be more flexible in negotiations with prospective borrowers’. Meanwhile, the market of corporate bonds, where the cost of borrowed funds depends on the company's performance, the rates have not changed much, remaining at 10.5-15%, the experts note, while the other benefits of raising money through bond issues (no need for a collateral, a potentially broader range of investors and creditors and generally longer terms) no longer seem as important.

As a result the total corporate credit portfolio of the banking sector (without reappraisals due to changes in currency exchange rates being taken into account) went up by 1.8% in 2017, reaching RUB 30.2 trillion while its ruble denominated part went up by 3.8%, reaching RUB 21.5 trillion. The market of corporate bonds was also growing (in terms of unredeemed par value it grew 16%, reaching RUB 11 trillion), but the bulk of the new bonds (92%) were issued by the largest, primarily state-owned corporations and banks. Meanwhile, the share of second and third echelon companies (private non-financial organizations) in total bond issues in 2017 was just 8%, having fallen four-fold over the past ten years (it was 34% in 2007), even though in absolute terms (given the ten-fold increase in the total market volume) bond issues by these companies have doubled in the same period (From RUB 442 billion to RUB 885 billion). In 2006 121 second and third echelon companies in the non-financial sector made 131 bond issues while in 2017 43 such companies made 59 bond issues, with the total debt being issued in the form of bonds remaining practically unchanged despite the accrued inflation. As a result, there are currently only 130 second and third non-financial sector companies that have their bonds in the market.

This text was drafted on the basis of the review and other materials published by the Kommersant newspaper.