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September typically brings a back-to-school tone to capital markets and with it, a bumper crop of new bonds. In Europe, this will probably largely miss out smaller companies, yet again.
Even accounting for the greater size of the US economy compared with the EU’s, the mismatch in bond-market borrowing for smaller companies is extreme. The number of corporate bonds hitting the market at a deal value of under $100mn is routinely more than double in the US what it is in the EU, figures from debt database Dealogic show. The US churns out more than 4,000 transactions like this every year.
Europe’s failure to keep pace is deeply baked in, and structural. Bankers who pull together bond deals for companies — figuring out a company’s appropriate borrowing cost and finding investors to buy the debt — say that smaller bonds are routine business in the US but in Europe, they are often more hassle, and not worth the bother. “It takes me the same amount of work on a €5bn trade as it does for €100mn, and after issue, the small bonds are not liquid,” says one.
The documentation is too weighty in relation to the fees, and often hinges on wet-ink signatures and stamped forms sent by fax, all in a patchwork of country-specific standards on tax and insolvency. In any case, as a rule European investors are just not interested in small deals.
It is hard to avoid the conclusion that thousands of smaller companies are missing out. Banks are typically happy to lend to them directly, but the hostile environment in corporate bonds freezes them out of an alternative source of funding.
This is just one aspect of the EU’s stumbling efforts to create a true capital markets union. At an event in Brussels earlier this year, EU financial services commissioner Mairead McGuinness continued to bang the drum on this, pressing the case to the assembled bankers, investors and market intermediaries for one of the bloc’s most elusive of goals, not as a vanity project but as a strategic imperative.
“We need to build a more sustainable economy and society,” she said. “And the public purse can help, but it will not be the main source of funding for this sustainability agenda.”
She was preaching to the choir: market participants know the tangle of competing rules and protocols for securities trading across Europe is a mess. And yet most are resigned to it.
“It is harder than it should be for investors to invest in another EU country, and this is 30 years after the establishment of the single market, and the reason is we don’t have a single market for capital,” McGuinness said, blaming a “lack of ambition” and “vested national interests”.
Former Italian prime minister Enrico Letta struck a similar tone in his markets review in April, stressing the “critical need for a more integrated and robust European financial market”.
This cuts across every asset class, allowing the US a free run at global dominance in stocks, but it hampers the less sexy world of corporate bonds too. Big companies have an easy ride, and Europe has built a thriving green bond market, but it is not yet serving the relative anywhere near as well as it could.
“This is about a spiral of missed opportunities,” said Jochen Metzger, a former Bundesbank official and now head of markets at NowCM — one of the smattering of companies out there trying to open the market up. Big companies like BMW can easily tap in to Europe’s market for green bonds, he said. “But the whole value chain behind BMW has to be sustainable too, which means many, many companies will need to make investments.”
Even the optimists here struggle to keep a straight face when arguing this circular problem can and will be fixed in their lifetimes. Investor interest is scant for a product that doesn’t exist at scale because the investor demand is not there. No single magic trick can solve all the cross-border tax, insolvency and legal issues at once.
The answer, or part of it, may not be to fix what is already there, but to embrace the private lending revolution that has already swept across the US. The latest data from the IMF suggested that Europe is a decade or so behind the US in the scale of lending by private equity firms and other specialists. But this would irritate and alarm those who fear, rightly or wrongly, that private markets obscure potentially systemic risks. Still, unless Europe can find the political will to make an all-access bond market a reality, it risks handing over the keys to more opaque forms of lending.