Moody's: Large, repeat issuers will drive growth in German corporate bond issuance in 2016

Moody's Investors Service expects steady but modest growth in German non-financial corporate bond issuance for 2016, despite favorable funding conditions. Large corporates will continue to favour bonds, while bank lending remains a preferred source of funding for SMEs. 

Moody's report titled "Non-Financial Corporates -- Germany: Modest Bond Issuance Growth In 2016 To Be Driven By Large Repeat Issuers" is now available on www.moodys.com. Moody's subscribers can access this report via the link provided at the end of this press release. 

"We expect the German bond market in 2016 to remain dominated by large, repeat issuers. Activity in 2015 has been driven by much fewer deals, but with the average size almost doubling. Bond investors are becoming increasingly selective, preferring repeat issuers with a higher rating to infrequent issuers with a weaker rating", said Anke Rindermann, Associate Managing Director at Moody's. "However, large and frequent German issuers, including higher-rated speculative grade corporates, will continue to be considered as safe havens for investors and should be able to obtain refinancing with attractive conditions in the bond market", adds Ms Rindermann. 

For the full year 2015, Moody's expects that total issuance volume will be around last year's level of €81 billion. Between 1 January and 30 September, German corporate bond issuance totalled €71 billion, 17% higher than the same period last year. Moody's attributes the trend towards large issue size to (1) increased M&A activity from blue-chip companies doing very large deals; and (2) the sustained bond supply from auto manufacturers, which usually issue larger sized notes at or above the benchmark level of EUR500 million. 

Moody's notes that the bank disintermediation trend has been reinforced in 2015 by low interest rates, with the average cost of bond financing becoming more competitive compared with bank financing. 

Large German corporates' demand for bank debt continues to decline as they prefer bonds over bank loans, which is a result of strong investor demand and favorable funding conditions. However, Moody's expects that bank lending will remain the preferred source of financing for small and mid-sized enterprises in 2016 owing to solid supply from banks and improved financing costs for new loans. 

Germany is currently Europe's largest high-yield market in terms of issuance volume and growth is expected to remain robust next year. Issuance levels will be driven by higher-rated speculative-grade corporates and especially by well-known repeat issuers, which investors still perceive as attractive. However, first-time issuance, especially by companies with a credit rating of a weakly positioned B2 or lower, is likely to remain subdued and will rely on favorable windows in the market. 

Moody's expects that the overall credit quality of German high-yield issuers will remain stable over the next 12-18 months, supported by their controlled capital spending in what remains an uncertain economic environment. Many companies have improved their credit ratings owing to strengthened cash flow generation and reduced financial leverage over the past few years.