By Daniel Hunter
New data on bond issuance by UK corporates shows that the lending crisis may be becoming more serious than previously thought. According to Syscap, the independent finance provider for commercial, professions and public sector organisations, corporates are now repaying far more money to bond holders than they are raising in new bonds.
In the aftermath of the financial crisis it was assumed that the gap left by falling bank lending had partly been filled by bond issuance. However, Syscap says bond issuance has been falling fast, with repayments outweighing issuance during 2012 as a whole, averaging a total net repayment of £19.6 billion. This compares with net issuance of £90.7 billion in 2008 at the peak of the financial crisis.
This matters to small to medium sized enterprises (SMEs) because larger corporates staying out of the bond markets and opting for shorter term borrowing instead, pushes SMEs lower down the pecking order when it comes to securing bank loans.
Syscap points out that this makes it more important than ever that the Government does more to assist the one significant area of the credit market that is increasing funding to businesses: leasing.
By contrast with the bond market, asset finance grew over the course of 2012, increasing lending to businesses by 5% to £14.0 billion.*
“At the peak of the financial crisis, big businesses raised substantial sums through the bond markets, and buyers were happy to invest as interest rates hit rock bottom," Philip White, Chief Executive of Syscap, said.
“Five years on, and things look very different — the banks still aren’t lending, but UK bond issuance is slowing — deepening the long drought in business investment.
“If bigger corporates are turning away from the bond markets and relying on shorter term financing through the banks, then the concern must be that it is making it harder for SMEs to make their case with the banks when it comes to lending decisions.
“Leasing has been a bright spot in all of this, providing businesses with the finance they need to grow and invest - inclusion in Treasury and Bank of England stimulus schemes could help it to do even more to support growth.”
Syscap say that the leasing industry could be helped to extend more finance to businesses that need it by:
· More use being made of the Bank of England’s powers to purchase leases and other bundles of asset backed loans from lenders in any future Quantative Easing schemes. This would allow those lenders to provide new funding to SMEs. The effect would be to drive down the costs of funding for SMEs.
· Opening the Funding for Lending scheme to the leasing sector. Independent leasing companies that are not bank-owned are currently not eligible for cheap loan funding under the scheme.
In the longer term, Syscap argues that a rebalancing of business funding away from bank loans and towards asset finance could turn out to be positive. Philip White explains that some traditional bank lending, such as overdrafts, can be discontinued at almost no notice. Even long-term loans can be withdrawn from businesses if the company's turnover or profitability falls below a threshold set by the bank as a pre-condition of its lending. Lease finance, however, stays in place just as long as the business is able to make its payments.
In addition, leasing allows a business to invest without reducing its vital cash facilities and without necessarily adding to the level of debt that it carries on its balance sheet. Because leasing does not affect its other credit lines, the business concerned has more scope to borrow money when needed in the future and the opportunity to maintain cash reserves.
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