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GFDR 2015 – Long-term Finance
Chapter 3:The Use of Markets for Long-term Finance
GFDR SEMINAR SERIES
FEBRUARY 24, 2015
Introduction
Lack of long-term finance: important and challenging concern in many countries
Short-termism can hamper development and can explain several financial crises
After the global crisis, more prominence in the policy discussions
Despite its bad reputation, short-term debt also has its purposes
Monitoring: agency problems, risk, inadequate regulations and institutions, etc.
Maturity structure: tradeoff between creditors and debtors in how to allocate risk
Long-term debt: shifts risk to creditors (bear fluctuations in probability of default, lossgiven default, and other factors) and require a premium to hold this debt
Short-term debt: shifts risk to debtors, forces them to rollover debt constantly
For the country as a whole, it is not clear that long-term debt is optimal given price
Still, do not know where different countries stand in use of short- and long-term debt
Introduction
Comprehensive documentation on the use of key markets by firms in many countries
Equity, bonds, syndicated loans during 1991-2013
1. Which markets do firms use to access longer-term funds? How have those evolved?
2. Which firms access these markets?
How many firms use long-term markets?
Which firms attributes are related to access?
Are longer-term issuers different?
Are there differences between firms from high-income and developing countries?
3. Are there differences in long-term finance provided by domestic and int’l markets?
4. How did the global financial crisis affect the main trends on each of these markets?
Data
Data coverage for capital raising activity from SDC Platinum
1991-2013
39 high-income countries
33 developing countries
533,482 issuances
Balance sheet data for publicly listed firms from Bureau van Dijk’s Orbis
2003-2011
51 countries (31 high-income; 20 developing countries)
45,527 firms
Other sources: Financial Development and Structure database and WDI database
Data
Many dimensions of the data
1. By instrument: equity, bonds, syndicated loans
2. By volume
3. By market: domestic, international
4. By borrowing country: high-income, developing
5. By lender country/region: Asia, Europe, U.S., ….
6. By borrowing firm: financial, non-financial (manufacturing, construction, trade, ….)
7. By borrowing firm attribute: issuer/non-issuer, size, age, ….
8. By use: project finance, refinancing, ….
9. By currency: domestic, foreign
10. By year: 1991, …., 2013
11. By maturity at issuance: 1yr, 2yr, ….
Country Classification
AfricaAustralia and
Oceania High-income AsiaEastern Europe and
Central Asia Developing AsiaLatin America and
Caribean Middle East Western Europe
China Egypt Australia* Hong Kong* Bulgaria Indonesia Argentina Bahrain* Austria*
India Morocco New Zealand* Japan* Croatia* Malaysia Bolivia Israel* Belgium*
United States* Nigeria Singapore* Czech Republic* Pakistan Brazil Jordan Cyprus*
South Africa Taiwan* Hungary* Philippines Chile Kuwait* Denmark*
Tunisia Kazakhstan Sri Lanka Colombia Oman* Finland*
Poland* Thailand Costa Rica Qatar* France*
Romania Vietnam Ecuador Saudi Arabia* Germany*
Russian Fed El Salvador Utd Arab Em* Greece*
Slovak Rep* Mexico Iceland*
Turkey Panama Ireland-Rep*
Ukraine Peru Italy*
Venezuela Luxembourg*
Netherlands*
Norway*
Portugal*
Slovenia*
Spain*
Sweden*
Switzerland*
United Kingdom*
Main Findings
1. Long-term financing for firms through the issuance of equity, bonds, and syndicated loans has grown rapidly between 1991 and 2013
Increased 5-fold in high-income countries, 15-fold in developing countries
Still much larger in high-income countries
2. Although equity market financing increased during this period, the growth in long-term financial markets has been mostly driven by debt markets
Corporate bonds and syndicated loans
80% of the total amount raised per year by firms
3. Only few, very large firms access long-term finance through equity or bond markets
Only the largest and oldest ones issue at the long-end of the maturity spectrum
Main Findings
4. Firms located in developing countries do not issue more short-term debt than those located in high-income countries: the average maturity is similar
5. International markets seem to play a key role in the provision of long-term finance
For firms located in developing countries
Important for size and for maturity
6. The global financial crisis of 2008-2009 hit debt markets particularly hard
Especially the syndicated loans originated in high-income countries
7. Domestic markets of corporate bonds and syndicated loans in some developing countries expanded rapidly during and after the crisis years
In particular in China and India
This growth did not compensate for the lack of long-term financing used to beprovided by international markets
Sections
Financial markets and long-term finance
Domestic and international markets
Global financial crisis: evidence on bonds and syndicated loans
Conclusions
Financial Markets and Long-term Finance
Literature on the importance of well-developed financial markets for economic growth
Size of the markets
Does not examine the activity in primary markets nor differentiates between short-and long-term financing
Scarce work on connection between primary markets and growth at micro-level
This section
Systematic evidence on the role played by a broad set of markets in many countries
Distinguishes the financing at different terms
Provides evidence on how broad the use of capital markets at different terms is
Association between the use capital markets and firm characteristics
Financial Markets and Long-term Finance
Total Amount Raised in Equity, Corporate Bond, and Syndicated Loan MarketsHigh-income Countries
Financial Markets and Long-term Finance
Total Amount Raised in Equity, Corporate Bond, and Syndicated Loan MarketsDeveloping Countries
Financial Markets and Long-term Finance
Equity could play complementary role
Informational role
Increases leverage capacity of firms
Syndicated loan financing
The most rapidly growing market up to the global financial crisis
Similar to corporate bonds in terms of size and maturity
Less costly than bonds in terms of origination fees, more discrete finance, specialimportance for developing country firms which have less developed capital markets
Still, surpassed more recently by corporate bonds and sensitive to crises
Financial Markets and Long-term Finance
Number of Firms IssuingAverage Number of Issuers per Year
Issuing Region\Market Equity Bonds S. Loans
A. Median Country
High-income Countries 19 22 10
Developing Countries 8 6 6
B. Pooled Data by Country/Region
United States 1,277 1,220 1,916
China 217 127 62
India 319 83 70
Africa 32 8 18
Australia and New Zealand 650 103 102
High-income Asia 681 494 853
Eastern Europe and Central Asia 69 54 89
Developing Asia 247 122 84
Latin America and Caribbean 110 270 69
Middle East 46 15 40
Western Europe 854 799 627
Financial Markets and Long-term Finance
Number of Firms IssuingAverage Number of Issuers per Year per Country – by Period
■ Number of Equity Issuers ■ Number of Bond Issuers ■ Number of Syndicated Loan Issuers
Financial Markets and Long-term Finance
Firm CharacteristicsHigh-income Countries
Non-issuers Equity IssuersShorter-Term Bond Issuers
Longer-Term Bond Issuers
Total Assets ($ mill) 123.4 246.2 ** 1,406.7 *** 6,739.8 ***
Sales ($ mill) 114.8 1,140.1 ** 295.2 *** 2,569.5 ***
Number of Employees 225 344 *** 948 *** 5,521 ***
Asset Growth 3.6% 8.5% *** 8.9% ** 6.7% ***
Sales Growth 4.2% 8.8% *** 5.7% ** 5.5% **
Employee Growth 0.7% 4.9% *** 5.0% *** 3.2% ***
Leverage 49.4% 52.2% *** 57.3% *** 62.5% ***
Long-term Debt/Total Liabilities 16.7% 21.0% *** 29.7% *** 39.1% ***
ROA 3.1% 2.7% ** 1.3% *** 3.9% **
Firm Age (in 2011) 23 17 *** 20 ** 32 **
Number of Firms 16,857 11,516 1,166 2,587
Percentage of Total Firms 56.27% 38.44% 3.89% 8.6%
No. of Observations for Total Assets 119,001 81,949 8,984 20,022
Financial Markets and Long-term Finance
Firm CharacteristicsDeveloping Countries
Non-issuers Equity IssuersShorter-Term Bond Issuers
Longer-Term Bond Issuers
Total Assets ($ mill) 66.0 191.2 *** 866.7 *** 2,027.3 ***
Sales ($ mill) 49.6 111.8 ** 257.9 *** 744.1 ***
Number of Employees 498 814 ** 3,750 *** 2,777 ***
Asset Growth 4.3% 13.1% *** 12.3% *** 11.4% ***
Sales Growth 7.6% 10.5% *** 13.9% *** 11.7% ***
Employee Growth 1.6% 4.2% ** 4.3% ** 4.5% **
Leverage 47.3% 51.2% ** 57.8% *** 59.1% ***
Long-term Debt/Total Liabilities 11.8% 20.9% *** 30.7% *** 42.0% ***
ROA 4.1% 4.6% ** 5.0% ** 4.8% **
Firm Age (in 2011) 30 21 *** 25 ** 35 **
Number of Firms 10,328 4,682 558 688
Percentage of Total Firms 66.3% 30.1% 3.6% 4.4%
No. of Observations for Total Assets 69,650 31,579 4,262 5,150
Financial Markets and Long-term Finance
Maturity Structure: Corporate Bonds
Cumulative Distribution Function (CDF)
Type of Country (i) Median (ii) Pooled Data
High income 6.7 7.2
Developing 7.2 7.8
Average Maturity
Financial Markets and Long-term Finance
Maturity Structure: Corporate BondsIssuing Region\ Type of Firm All Firms Non-Financial Firms Financial Firms
A. Median Country
High-income Countries 6.7 8.6 5.9
Developing Countries 7.2 8.2 6.7
B. Pooled Data by Group of Countries
High-income Countries 7.2 9.6 5.9
Developing Countries 7.8 7.8 7.7
C. Pooled Data by Country/Region
United States 7.8 10.8 5.6
China 7.3 5.9 9.1
India 7.5 8.3 7.2
Africa 7.7 7.9 7.5
Australia and New Zealand 6.1 9.6 5.2
High-income Asia 7.1 7.6 6.3
Eastern Europe and Central Asia 7.2 8.2 6.3
Developing Asia 8.1 8.6 7.6
Latin America and Caribbean 8.4 9.1 7.3
Middle East 7.6 10.2 6.5
Western Europe 6.7 8.4 6.2
Similar average maturity of corporate bonds issued by different countries/regions
Financial Markets and Long-term Finance
Maturity Structure: Corporate BondsIssuing Region\ Type of Firm All Firms Non-Financial Firms Financial Firms
A. Median Country
High-income Countries 6.7 8.6 5.9
Developing Countries 7.2 8.2 6.7
B. Pooled Data by Group of Countries
High-income Countries 7.2 9.6 5.9
Developing Countries 7.8 7.8 7.7
C. Pooled Data by Country/Region
United States 7.8 10.8 5.6
China 7.3 5.9 9.1
India 7.5 8.3 7.2
Africa 7.7 7.9 7.5
Australia and New Zealand 6.1 9.6 5.2
High-income Asia 7.1 7.6 6.3
Eastern Europe and Central Asia 7.2 8.2 6.3
Developing Asia 8.1 8.6 7.6
Latin America and Caribbean 8.4 9.1 7.3
Middle East 7.6 10.2 6.5
Western Europe 6.7 8.4 6.2
Financial Markets and Long-term Finance
Maturity Structure: Corporate BondsIssuing Region\ Type of Firm All Firms Non-Financial Firms Financial Firms
A. Median Country
High-income Countries 6.7 8.6 5.9
Developing Countries 7.2 8.2 6.7
B. Pooled Data by Group of Countries
High-income Countries 7.2 9.6 5.9
Developing Countries 7.8 7.8 7.7
C. Pooled Data by Country/Region
United States 7.8 10.8 5.6
China 7.3 5.9 9.1
India 7.5 8.3 7.2
Africa 7.7 7.9 7.5
Australia and New Zealand 6.1 9.6 5.2
High-income Asia 7.1 7.6 6.3
Eastern Europe and Central Asia 7.2 8.2 6.3
Developing Asia 8.1 8.6 7.6
Latin America and Caribbean 8.4 9.1 7.3
Middle East 7.6 10.2 6.5
Western Europe 6.7 8.4 6.2
Financial Markets and Long-term Finance
Maturity Structure: Corporate Bonds
% of the Total Raised – by Firms’ Sector Average Maturity – by Firms’ Sector
High-income Countries Developing Countries
Financial Markets and Long-term Finance
Maturity Structure: Syndicated Loans
Cumulative Distribution Function (CDF)
Type of Country (i) Median (ii) Pooled Data
High Income 5.8 4.7
Developing 6.6 6.9
Average Maturity
Financial Markets and Long-term Finance
Maturity Structure: Syndicated LoansIssuing Region\ Type of Firm All Firms Non-Financial Firms Financial Firms
A. Median CountryHigh-income Countries 5.8 6.1 4.7Developing Countries 6.6 7.6 4.0
B. Pooled Data by Group of CountriesHigh-income Countries 4.7 4.9 3.7Developing Countries 6.9 7.6 4.2
C. Pooled Data by Country/RegionUnited States 4.2 4.5 3.2China 9.6 10.5 7.6India 9.4 10.0 4.8
Africa 6.7 7.4 4.1Australia and New Zealand 4.6 4.8 4.1High-income Asia 4.2 4.2 4.4Eastern Europe and Central Asia 5.3 6.3 2.8Developing Asia 6.7 7.4 4.3Latin America and Caribbean 6.0 6.3 4.1Middle East 8.3 9.4 4.8Western Europe 5.5 5.6 4.8
Longer maturities for firms in developing countries
Financial Markets and Long-term Finance
Maturity Structure: Syndicated LoansIssuing Region\ Type of Firm All Firms Non-Financial Firms Financial Firms
A. Median CountryHigh-income Countries 5.8 6.1 4.7Developing Countries 6.6 7.6 4.0
B. Pooled Data by Group of CountriesHigh-income Countries 4.7 4.9 3.7Developing Countries 6.9 7.6 4.2
C. Pooled Data by Country/RegionUnited States 4.2 4.5 3.2China 9.6 10.5 7.6India 9.4 10.0 4.8
Africa 6.7 7.4 4.1Australia and New Zealand 4.6 4.8 4.1High-income Asia 4.2 4.2 4.4Eastern Europe and Central Asia 5.3 6.3 2.8Developing Asia 6.7 7.4 4.3Latin America and Caribbean 6.0 6.3 4.1Middle East 8.3 9.4 4.8Western Europe 5.5 5.6 4.8
Also longer maturities for non-financial firms in developing countries
Financial Markets and Long-term Finance
Maturity Structure: Syndicated Loans
% of the Total Raised - by Firms’ Sector Average Maturity – by Firms’ Sector
High-income Countries Developing Countries
Financial Markets and Long-term Finance
Maturity Structure: Syndicated Loans
% of the Total Raised – by Firms’ Primary Use of Proceeds Average Maturity – by Firms’ Primary Use of Proceeds
High-income Countries Developing Countries
Sections
Financial markets and long-term finance
Domestic and international markets
Global financial crisis: evidence on bonds and syndicated loans
Conclusions
Domestic and International Markets
Distinction between domestic and international markets important under globalization
These markets could provide different funding options for the firms that participate
Not only funds at different maturities, but also funds of different sizes and currencies
Here, focus on maturity
Domestic and international markets might provide complementary services
Reports highlight importance of efficient and active domestic bond markets
Domestic markets require macroeconomic and institutional soundness
Sound corporate governance, robust legal framework, a diversified investor base, andefficient infrastructure
Good performance of the related markets: money markets, government debt market,and banks
Domestic and International Markets
Amount Raised per Year in Corporate Bond Markets ($ mill) – by Market Location
Issuing Region\Market Place Domestic Market International Market %Abroad
A. Median Country
High-income Countries 490 1,558 76.1%
Developing Countries 72 361 83.3%
B. Pooled Data by Country/Region
United States 309,484 78,264 20.2%
China 29,373 2,393 7.5%
India 3,555 1,786 33.4%
Africa 160 1,146 87.8%
Australia and New Zealand 2,731 10,077 78.7%
High-income Asia 75,511 22,287 22.8%
Eastern Europe and Central Asia 4,128 6,512 61.2%
Developing Asia 8,350 3,768 31.1%
Latin America and Caribbean 17,296 19,297 52.7%
Middle East 266 2,678 91.0%
Western Europe 62,195 151,599 70.9%
Domestic and International Markets
Average Maturity of Domestic and International Corporate Bonds Issuances
Market Place Domestic Market International Market
A. Median Country
High-income Countries 8.0 8.6Developing Countries 6.4 10.0
B. Pooled Data by Group of Countries
High-income Countries 10.5 8.3Developing Countries 6.8 9.7
C. Pooled Data by Country/Region
United States 11.3 8.9China 5.8 6.9India 8.8 7.2
Africa 6.3 8.1Australia and New Zealand 10.0 9.6High-income Asia 8.0 6.7Eastern Europe and Central Asia 8.3 8.2Developing Asia 7.6 10.9Latin America and Caribbean 7.5 10.6Middle East 10.5 10.2Western Europe 9.2 8.0
Domestic bonds issued in high-income countries have longer maturities
Domestic and International Markets
Average Maturity of Domestic and International Corporate Bonds Issuances
Market Place Domestic Market International Market
A. Median Country
High-income Countries 8.0 8.6Developing Countries 6.4 10.0
B. Pooled Data by Group of Countries
High-income Countries 10.5 8.3Developing Countries 6.8 9.7
C. Pooled Data by Country/Region
United States 11.3 8.9China 5.8 6.9India 8.8 7.2
Africa 6.3 8.1Australia and New Zealand 10.0 9.6High-income Asia 8.0 6.7Eastern Europe and Central Asia 8.3 8.2Developing Asia 7.6 10.9Latin America and Caribbean 7.5 10.6Middle East 10.5 10.2Western Europe 9.2 8.0
Domestic and International Markets
Average Maturity of Domestic and International Corporate Bonds Issuances
Cumulative Distribution Function (CDF)
Type of Country (i) Median (ii) Pooled Data
High Income 8.6 9.6
Developing - Domestic 6.4 6.8
Developing - International 10.0 9.7
Average Maturity
Size of Domestic and International Corporate Bonds Issuances
High-income Countries Developing Countries
Domestic and International Markets
Size of Domestic and International Corporate Bonds Issuers
High-income Countries Developing Countries
Domestic and International Markets
Domestic and International Markets
Average Maturity in Domestic Markets vs. Continuous Measures of Domestic Financial DevelopmentPrivate Bond Capitalization over GDP
Domestic and International Markets
Average Maturity in Domestic Markets vs. Continuous Measures of Domestic Financial DevelopmentPrivate Credit over GDP
Domestic and International Markets
Average Maturity in Domestic Markets vs. Continuous Measures of Domestic Financial DevelopmentStock Market Capitalization over GDP
Domestic and International Markets
Average Maturity in Domestic Markets vs. Continuous Measures of Domestic Financial DevelopmentNumber of Domestic Bond Issuances
Domestic and International Markets
Amount Raised per Year in Syndicated Loan Markets ($ mill) – by Market Location
Issuing Region\Market Place Domestic Market International Market %International
A. Median Country
High-income Countries 593 5,292 89.9%Developing Countries 62 1,283 95.4%
B. Pooled Data by Country/Region
United States 543,326 252,902 31.8%
China 7,200 4,385 37.8%
India 14,837 4,609 23.7%
Africa 1,331 5,593 80.8%
Australia and New Zealand 14,356 21,889 60.4%
High-income Asia 101,275 20,546 16.9%
Eastern Europe and Central Asia 2,379 27,972 92.2%
Developing Asia 4,048 11,133 73.3%
Latin America and Caribbean 1,600 22,118 93.3%
Middle East 5,396 17,773 76.7%
Western Europe 135,962 294,006 68.4%
Sections
Financial markets and long-term finance
Domestic and international markets
Global financial crisis: evidence on bonds and syndicated loans
Conclusions
Global Financial Crisis
Total Amount Raised in Debt MarketsHigh-income Countries
Global Financial Crisis
Total Amount Raised in Debt MarketsDeveloping Countries
Global Financial Crisis
Average Maturity of Corporate Bonds and Syndicated Loan IssuancesHigh-income Countries
Global Financial Crisis
Average Maturity of Corporate Bonds and Syndicated Loan IssuancesDeveloping Countries
Global Financial Crisis
Total Amount Raised in Domestic and International Corporate Bond Markets High-income Countries
Global Financial Crisis
Total Amount Raised in Domestic and International Corporate Bond Markets Developing Countries
Global Financial Crisis
Total Amount Raised in Corporate Bond Markets by Financial and Non-Financial Companies High-income Countries
Global Financial Crisis
Total Amount Raised in Corporate Bond Markets by Financial and Non-Financial Companies Developing Countries
Global Financial Crisis
Total Amount Raised in Domestic and International Syndicated Loan Markets High-income Countries
Global Financial Crisis
Total Amount Raised in Domestic and International Syndicated Loan Markets Developing Countries
Global Financial Crisis
Total Amount Lent to Developing Countries through Syndicated Loan Markets by Lender Region
Global Financial Crisis
Syndicated Lending to Developing Countries for "Project Finance"
Sections
Financial markets and long-term finance
Domestic and international markets
Global financial crisis: evidence on bonds and syndicated loans
Conclusions
Conclusions
Corporate bond and syndicated loan markets: significant growth during last decades
Only few, very large firms access financial markets
Only the largest and oldest ones issue at the long end
For firms that use markets, not clear problem of access to long-term funds for developing country firms
Still, a smaller proportion of firms are able to access financial markets in developing countries, thus equity problem across firms and need to rely on other financing
To broaden access to long-term financial markets, it might help to reduce the costs associated to the issuance process and further develop domestic markets
But this is difficult to achieve and not always in the hands of policy makers, especially incompetitive markets
Conclusions
Developing country firms rely more on international markets to obtain longer-term funds
Effort to compensate for the underdevelopment of their domestic markets
Beneficial because they complement domestic markets by allowing firms to access a wider setof investors
But even larger firms access international markets
More vulnerability to currency mismatches and crises in international markets
The reliance on only one type of instrument (bonds, syndicated loans) or market (domestic, international) to finance long-term projects is risky
Countries can become susceptible to shocks
Countries would be better off with more complete financial markets, especially for smaller firms
Importance of complementarities across instruments and markets: more work needed
Thank you!