GFDR 2015 Lo Long-term Finance Cha hapt pter 3: Th The Use of - - PowerPoint PPT Presentation

GFDR 2015 – Lo Long-term Finance

Cha hapt pter 3: Th The Use of Markets for Long ng-term Fina nanc nce

GFDR SEMINAR SERIES FEBRUARY 24, 2015

Introduction

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Lack of long-termfinance: importantand challenging concernin many countries

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Short-termismcan hamper developmentand can explain several financial crises

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After the global crisis, more prominence in the policy discussions

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Despite its bad reputation,short-termdebtalso has its purposes



Monitoring: agency problems, risk, inadequate regulations and institutions,etc.

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Maturity structure: tradeoff betweencreditorsand debtorsin how to allocate risk

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Long-term debt: shifts risk to creditors (bear fluctuations in probability of default, loss given default, and other factors) and requirea premium to hold this debt

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Short-termdebt: shifts risk to debtors,forces them to rollover debtconstantly

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For the country as a whole,it is not clear that long-termdebt is optimal given price

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Still, do not know wheredifferentcountries stand in use of short- and long-termdebt

Introduction

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Comprehensive documentation on the use of key markets by firms in many countries



Equity,bonds, syndicated loansduring1991-2013 1. Which markets do firms use to access longer-term funds? How have those evolved? 2. Which firms access these markets?

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How many firms use long-termmarkets?

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Which firms attributesare related to access?

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Are longer-termissuersdifferent?

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Are there differences betweenfirms fromhigh-income and developingcountries? 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

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Data coverage for capital raising activity from SDC Platinum

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1991-2013

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39 high-incomecountries

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33 developingcountries

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533,482 issuances

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Balance sheet data for publicly listed firms from Bureau van Dijk’s Orbis

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2003-2011

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51 countries(31 high-income; 20 developingcountries)

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45,527 firms

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Other sources: Financial Development and Structure database and WDI database

Data

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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

Africa Australia and Oceania High-income Asi sia Eastern Europe and Central Asia Developing Asi sia Latin America and Caribean Middle East st 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-incomecountries, 15-fold in developingcountries

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Still much larger in high-incomecountries 2. Although equity market financing increased during this period, the growth in long-term financial markets has been mostly driven by debt markets



Corporatebondsand syndicated loans

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80% of the total amountraised per year by firms 3. Only few, very large firms access long-term finance through equity or bond markets

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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 developingcountries

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Importantfor size and for maturity 6. The global financial crisis of 2008-2009 hit debt markets particularly hard

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Especially the syndicatedloans 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

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In particular in China and India

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This growth did not compensate for the lack of long-term financing used to be providedby internationalmarkets

Sections



Financial markets and long-term finance

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Domestic and international markets

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Global financial crisis: evidence on bonds and syndicated loans



Conclusions

Financial Markets and Long-term Finance

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Literature on the importance of well-developed financial markets for economic growth



Size of the markets

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Does not examine the activity in primary markets nor differentiates between short- and long-termfinancing

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Scarcework on connection between primary marketsand growth at micro-level

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This section

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Systematic evidenceon the role played by a broad set of markets in many countries

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Distinguishesthe financingat differentterms

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Provides evidence on howbroad the use of capital markets at differenttermsis

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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 Markets

High-income Countries

Financial Markets and Long-term Finance

Total Amount Raised in Equity, Corporate Bond, and Syndicated Loan Markets

Developing Countries

Financial Markets and Long-term Finance



Equity could play complementary role



Informationalrole

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Increases leveragecapacity of firms

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Syndicated loan financing

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The most rapidly growingmarket up to the global financial crisis

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Similar to corporate bonds in terms of size and maturity



Less costly than bonds in terms of origination fees, more discrete finance, special importance for developingcountry firmswhich haveless developed capitalmarkets

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Still, surpassed morerecently by corporate bondsand sensitive to crises

Financial Markets and Long-term Finance

Number of Firms Issuing

Average 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 Issuing

Average 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 Characteristics

High-income Countries

Non-issuers Equity Issuers Shorter-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 Characteristics

Developing Countries

Non-issuers Equity Issuers Shorter-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 Bonds

Issuing Region\ Type of Firm All Firms Non-Financial Firms Financial Firms

• A. Median Co

Country High-income Countries 6.7 8.6 5.9 Developing Countries 7.2 8.2 6.7

• B. Pooled Data by Group of Co

Countries High-income Countries 7.2 9.6 5.9 Developing Countries 7.8 7.8 7.7

• C. Pooled Data by Co

Country/Re 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 Bonds

Issuing Region\ Type of Firm All Firms Non-Financial Firms Financial Firms

• A. Median Co

Country High-income Countries 6.7 8.6 5.9 Developing Countries 7.2 8.2 6.7

• B. Pooled Data by Group of Co

Countries High-income Countries 7.2 9.6 5.9 Developing Countries 7.8 7.8 7.7

• C. Pooled Data by Co

Country/Re 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

Issuing Region\ Type of Firm All Firms Non-Financial Firms Financial Firms

• A. Median Co

Country High-income Countries 6.7 8.6 5.9 Developing Countries 7.2 8.2 6.7

• B. Pooled Data by Group of Co

Countries High-income Countries 7.2 9.6 5.9 Developing Countries 7.8 7.8 7.7

• C. Pooled Data by Co

Country/Re 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 Loans

Issuing Region\ Type of Firm All Firms Non-Financial Firms Financial Firms

• A. Median Co

Country High-income Countries 5.8 6.1 4.7 Developing Countries 6.6 7.6 4.0

• B. Pooled Data by Group of Co

Countries High-income Countries 4.7 4.9 3.7 Developing Countries 6.9 7.6 4.2

• C. Pooled Data by Co

Country/Re Regi gion United States 4.2 4.5 3.2 China 9.6 10.5 7.6 India 9.4 10.0 4.8 Africa 6.7 7.4 4.1 Australia and New Zealand 4.6 4.8 4.1 High-income Asia 4.2 4.2 4.4 Eastern Europe and Central Asia 5.3 6.3 2.8 Developing Asia 6.7 7.4 4.3 Latin America and Caribbean 6.0 6.3 4.1 Middle East 8.3 9.4 4.8 Western Europe 5.5 5.6 4.8

Longer maturities for firms in developing countries

Financial Markets and Long-term Finance

Maturity Structure: Syndicated Loans

Issuing Region\ Type of Firm All Firms Non-Financial Firms Financial Firms

• A. Median Co

Country High-income Countries 5.8 6.1 4.7 Developing Countries 6.6 7.6 4.0

• B. Pooled Data by Group of Co

Countries High-income Countries 4.7 4.9 3.7 Developing Countries 6.9 7.6 4.2

• C. Pooled Data by Co

Country/Re Regi gion United States 4.2 4.5 3.2 China 9.6 10.5 7.6 India 9.4 10.0 4.8 Africa 6.7 7.4 4.1 Australia and New Zealand 4.6 4.8 4.1 High-income Asia 4.2 4.2 4.4 Eastern Europe and Central Asia 5.3 6.3 2.8 Developing Asia 6.7 7.4 4.3 Latin America and Caribbean 6.0 6.3 4.1 Middle East 8.3 9.4 4.8 Western 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

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Distinction between domestic and international markets important under globalization

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These markets could provide different funding options for the firms that participate

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Not only fundsat differentmaturities, but also funds of differentsizes and currencies

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Here, focuson maturity

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Domestic and internationalmarkets might provide complementaryservices

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Reports highlight importance of efficient and active domestic bond markets

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Domestic markets require macroeconomic and institutional soundness

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Sound corporate governance, robust legal framework, a diversified investor base, and efficientinfrastructure

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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 Co

Country High-income Countries 490 1,558 76.1% Developing Countries 72 361 83.3%

• B. Pooled Data by Co

Country/Re Regi gion 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 8.6 Developing Countries 6.4 10.0

• B. Pooled Data by Group of Countries

High-income Countries 10.5 8.3 Developing Countries 6.8 9.7

• C. Pooled Data by Country/Region

United States 11.3 8.9 China 5.8 6.9 India 8.8 7.2 Africa 6.3 8.1 Australia and New Zealand 10.0 9.6 High-income Asia 8.0 6.7 Eastern Europe and Central Asia 8.3 8.2 Developing Asia 7.6 10.9 Latin America and Caribbean 7.5 10.6 Middle East 10.5 10.2 Western 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 8.6 Developing Countries 6.4 10.0

• B. Pooled Data by Group of Countries

High-income Countries 10.5 8.3 Developing Countries 6.8 9.7

• C. Pooled Data by Country/Region

United States 11.3 8.9 China 5.8 6.9 India 8.8 7.2 Africa 6.3 8.1 Australia and New Zealand 10.0 9.6 High-income Asia 8.0 6.7 Eastern Europe and Central Asia 8.3 8.2 Developing Asia 7.6 10.9 Latin America and Caribbean 7.5 10.6 Middle East 10.5 10.2 Western 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 Development

Private Bond Capitalization over GDP

Domestic and International Markets

Average Maturity in Domestic Markets vs. Continuous Measures of Domestic Financial Development

Private Credit over GDP

Domestic and International Markets

Average Maturity in Domestic Markets vs. Continuous Measures of Domestic Financial Development

Stock Market Capitalization over GDP

Domestic and International Markets

Average Maturity in Domestic Markets vs. Continuous Measures of Domestic Financial Development

Number 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 Co

Country High-income Countries 593 5,292 89.9% Developing Countries 62 1,283 95.4%

• B. Pooled Data by Co

Country/Re Regi gion 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 Markets

High-income Countries

Global Financial Crisis

Total Amount Raised in Debt Markets

Developing Countries

Global Financial Crisis

Average Maturity of Corporate Bonds and Syndicated Loan Issuances

High-income Countries

Global Financial Crisis

Average Maturity of Corporate Bonds and Syndicated Loan Issuances

Developing 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 in competitive 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 set

• f 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!