Just when it seemed like Europe was getting back on its feet the troubled zone may be in for more disruption. That’s according to a Greenwich Associates report that says European credit markets may face a rocky 2013.
At the end of January, many eurozone banks were rushing to pay off emergency funding they tapped during the financial crisis. Also, the past several sovereign debt auctions have been met with good demand. Nonetheless, says Greenwich in its latest report, “2012: The Year Of The Corporate Bond In Europe,” new capital rules will put a dent in liquidity and ultimately costing companies a bit more to issue debt
“In coming months, new capital rules will continue to alter the economics of fixed income for Europe’s major dealers, reducing market liquidity and ultimately increasing costs to corporate bond issuers,” Greenwich said in a press release. “Those costs might not seem significant at a time when high-quality companies are able to issue long-dated bonds at record low rates and high-yield issuers have unprecedented access to capital markets funding. But as interest rates rise, a new liquidity premium could make bond market financing much less attractive.”
If that happens, Greenwich says, companies might start using bank loans again, which was traditionally the way the obtained funding. But it will not be the same as it used to be, Greenwich says. That’s because banks have been unsuccessful in pushing back against coming regulation. As a result, they continue to slash their balance sheets in order to comply with the coming capital and liqiidity rules. Banksers at a 2012 NeuGroup Tech20 Treasurers’ Peer Group meeting predicted European banks will be delevering for years to come; to the likely tune of $3-4 trillion.
As a result banks will deeply reduce the size of fixed-income inventories and likely make changes corporate lending practices, Greenwich says. “The upshot for companies and investors: Nobody really knows what the ultimate impact of these changes will be in terms of the price and availability of credit.”
Most companies and investors already know they’ll see increases their funding costs, but they could be much greater than some issuers realize. “That’s because new capital rules and other changes will eat into bank lending capacity,” Greenwhich says. “There is no guarantee that European companies will be able to easily return to their traditional source of financing if reduced bond market liquidity makes capital markets funding prohibitively expensive as interest rates begin to rise.”