Bond-Market Finance Takes Hold

LONDON -- An unprecedented rise in European companies' use of bond markets, rather than banks, to raise money could cool off in coming months. But the shift toward bond-market finance across the continent may be here to stay.

European companies have historically relied on lending from banks, rather than tapping the bond markets as U.S. companies tend to. Yet despite the fact that European politicians have loudly blamed "Anglo-Saxon capitalism" for the global financial crisis, companies across the continent have this year raised billions of dollars, American style, from the bond markets.

As banks curb lending in an effort to strengthen their own finances, the bond markets have come to life like never before, providing companies with a crucial lifeline amid a sharp recession. So far this year, with no help from government guarantees, European nonfinancial companies outside the U.K. have raised some $318 billion from the bond markets, up 45% from the whole of 2008 and more than any entire year on record, according to data provider Dealogic Inc.

Although official data show bank lending flattening rather than tumbling through the first quarter, companies and bank regulators report that banks are starting to retreat from lending as they rebuild their balance sheets.

One drawback with bond-market financing is that the market isn't always open for business. In fact, in the short term, such a setback may be in the cards. "The market has gotten a little ahead of itself," says Stephen Dulake, a credit analyst at J.P. Morgan Chase. According to J.P. Morgan, 60% of European credit investors plan to reduce their exposure or hold steady, even as more than half expect to have more money to manage.

Nigel Sillis, director of fixed-income and currency research at Baring Asset Management, says he remains "enthusiastic" about corporate debt but has grown more wary of where the market is headed. "We're certainly a lot keener on watching market developments," he says. Bond investors are questioning economic recovery, and worries about the financial strength of companies are beginning to revive. Also, some of the bond buyers in the recent rallies may have been speculating on market momentum rather than taking long-term views, suggesting a selloff is possible.

Source: online.wsj.com