Fitch: QE Pushes European Corporate Bond Issuance Ahead of Loans

European companies are on course to raise more bonds than loans in 1Q15, with the ECB's EUR1.1 trillion QE programme supporting low funding costs in the bond markets, Fitch Ratings says.
Corporate bond issuance for 1Q15 had reached EUR118bn by 19 March while syndicated loans totalled EUR113bn, according to Dealogic data. This means full-quarter bond volumes may match or even exceed those of 1Q14 at EUR128bn when bonds accounted for a record 55% of total corporate debt funding (bonds and loans).  It will also exceed the EUR97bn quarterly average since 2010. 

We expect bond issuance to be boosted in 2015 by rising levels of M&A activity as companies turn their sights on future growth in a slowly improving economy - rather than increasing expansionary capex. Industry consolidation in the telecoms, building materials and pharma sectors and debt refinancing in favourable capital markets will contribute to strong issuance in 2015.

The oil and gas sector contributed almost one-quarter of total new bond issuance with an all-time high of EUR26bn, twice the amount issued in the same period last year. Utility and energy was the second largest sector with EUR15bn, followed by autos with EUR14bn; both the highest since 1Q14.

We believe the high level of bond issuance by oil and gas companies reflects a combination of still strong pricing, with the effects of QE outweighing the falling oil price, and a desire to ensure strong liquidity to see them through the current downturn. Companies also have an eye on protecting credit metrics, which contributed to Total and Repsol issuing sizeable hybrids (USD5bn and USD2bn respectively). BP and Statoil were among the largest issuers of non-hybrid debt in the quarter. Companies have generally suggested that M&A is off the agenda for now, with most likely to be net divesters this year - but if valuations come down sufficiently, some may be tempted in coming months.

The competitive funding conditions in Europe are attracting foreign issuers to the euro markets. The share of European currency bonds issued by non-European companies rose to its highest level since at least 1999 in 1Q15 as low corporate bond spreads and divergent monetary policy from the US increased the appeal of the European market. 
We will publish our quarterly report on corporate funding disintermediation in the coming weeks, providing a more detailed analysis of the data. A report on international corporate issuance in Europe will be published this week.