gfdr 2015 long-term finance - world bankpubdocs.worldbank.org/pubdocs/publicdoc/2015/9/... ·...

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


Total Amount Raised in Equity, Corporate Bond, and Syndicated Loan MarketsHigh-income Countries


Total Amount Raised in Equity, Corporate Bond, and Syndicated Loan MarketsDeveloping Countries


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


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


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


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


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


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


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



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


Maturity Structure: Corporate BondsIssuing Region\ Type of Firm All Firms Non-Financial Firms Financial Firms

A. Median Country







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


Maturity Structure: Corporate Bonds

% of the Total Raised – by Firms’ Sector Average Maturity – by Firms’ Sector

High-income Countries Developing Countries


Maturity Structure: Syndicated Loans



High Income 5.8 4.7

Developing 6.6 6.9

Average Maturity


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


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



% of the Total Raised - by Firms’ Sector Average Maturity – by Firms’ Sector




% of the Total Raised – by Firms’ Primary Use of Proceeds Average Maturity – by Firms’ Primary Use of Proceeds


Sections




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


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%


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%


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




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



Market Place Domestic Market International Market

A. Median Country





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





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



Size of Domestic and International Corporate Bonds Issuers




Average Maturity in Domestic Markets vs. Continuous Measures of Domestic Financial DevelopmentPrivate Bond Capitalization over GDP


Average Maturity in Domestic Markets vs. Continuous Measures of Domestic Financial DevelopmentPrivate Credit over GDP


Average Maturity in Domestic Markets vs. Continuous Measures of Domestic Financial DevelopmentStock Market Capitalization over GDP


Average Maturity in Domestic Markets vs. Continuous Measures of Domestic Financial DevelopmentNumber of Domestic Bond Issuances


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%


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




Conclusions

Global Financial Crisis

Total Amount Raised in Debt MarketsHigh-income Countries


Total Amount Raised in Debt MarketsDeveloping Countries


Average Maturity of Corporate Bonds and Syndicated Loan IssuancesHigh-income Countries


Average Maturity of Corporate Bonds and Syndicated Loan IssuancesDeveloping Countries


Total Amount Raised in Domestic and International Corporate Bond Markets High-income Countries


Total Amount Raised in Domestic and International Corporate Bond Markets Developing Countries


Total Amount Raised in Corporate Bond Markets by Financial and Non-Financial Companies High-income Countries


Total Amount Raised in Corporate Bond Markets by Financial and Non-Financial Companies Developing Countries


Total Amount Raised in Domestic and International Syndicated Loan Markets High-income Countries


Total Amount Raised in Domestic and International Syndicated Loan Markets Developing Countries


Total Amount Lent to Developing Countries through Syndicated Loan Markets by Lender Region


Syndicated Lending to Developing Countries for "Project Finance"

Sections




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!

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