LMG Analytics: Debt issues down in the banking sector

Debt issuance in the banking and financial sector fell by 6.3% in 2020 compared to previous years, according to data provided by LMG Analytics Debt Capital Markets service.

With the exception of the utilities sector, which saw a decline of around half a percentage point, all other sectors saw increased emissions last year, including transport, technology, petroleum and other sectors. gas, construction and real estate.

In a year dominated by Covid-19, this is attributable to the vast financial implications of the pandemic.

“At first, everyone in the banking industry worried about the credit crunch and borrowed,” said Jeff Karpf, Capital Markets team partner at Cleary Gottlieb. “Unlike the travel, real estate or transportation industries, it quickly became apparent that banks needed less liquidity and liquidity than other industries, unlike the financial crisis, because they had better years. “

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This is evident in the structure of bank lending, while banks borrowed at the start of the pandemic, they quickly slowed down to a reasonable rate.

“More importantly, the total dollar volume of debt capital markets increased significantly in 2020 compared to 2019,” Karpf continued. “In the United States, once the Federal Reserve announced its support package, borrowing became very cheap and easy. ”

“Everyone crowded in to borrow, so the financial sector ended up representing a smaller percentage of the total sector of the debt capital market than it was the year before,” a- he added.

Transactions sector 2019 2020
Banking and financial services 51.6% 45.3%
Immovable 10.2% 10.3%
Construction 5.3% 5.7%
Utilities 5.6% 4.9%
Technology and telecommunications 3.2% 4.6%
Transport 3.6% 4.1%
Consumer goods and services 2.8% 4.0%
Industry and Manufacturing 2.6% 3.2%
Investment and fund management 2.1% 2.3%
Oil and gas 1.9% 2.3%

Liquidity

LMG Analytics primarily focuses on the relationships between issuers, underwriters and the law firms that advise them. In addition to volume and value, the underlying data feeds into an analysis machine that measures the sustainability of firm / firm relationships, the complexity of each transaction in the database, and each firm’s market share across several filters.

The data covers over eleven thousand DCM transactions as of 2020 alone, representing $ 6.06 trillion in bond sales.

As the data shows, many other sectors have seen a marked increase in the number of loans.

According to John Meade, a partner at Davis Polk, many of those who borrowed in the second quarter did so for fear that accessing cash would become difficult. “Those who were there during the financial crisis would remember the disruption in the markets, especially the commercial paper market,” he said. “People may not have expected the same disruption this time around, but they were probably expecting liquidity to tighten.”

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Transport was a sector that had a very active 2020. For example, airlines and cruise ships borrowed because income had dropped dramatically, which is part of the reason for the increase in numbers there. “It wasn’t because they were flying or sailing more, it was exactly the opposite,” Meade added. “They were saving money in the hope that they would have enough to get through the crisis.”

Impact of Covid-19

The pandemic had an interesting effect on transaction activity in 2020. While the first two quarters of 2019 saw a lot of activity, things slowed down in the second half of the year. As the coronavirus took hold, transactions fell dramatically, then stabilized at a baseline for almost six months. According to research, it wasn’t until mid-August 2020 that there was an uptick, signaling a change in attitude towards the agreements. In November 2020, transactions had reached their highest level since the start of the year.

covid effect

In 2019, interest rates were low and companies borrowed heavily in the first half of the year before slowing down in the second. “Leaving Covid-19 aside, no one has entered 2020 expecting it to be a year of high debt in the capital markets,” Karpf said. “Everyone thought that interest rates might start to rise, the US economy in particular was strong at the end of 2019.” When the pandemic started and the Fed introduced its safety net, things got pretty badly. accelerated for the second and third quarters of 2020..

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In March and early April, companies began to store cash. In those early weeks, when Covid-19 first escalated dramatically, there was a clear concern that no one really knew what was going on around the corner.

“Corporate treasurers decided to take advantage and raise significant sums when the market was open, but then – as the data suggests – it calmed down,” Meade said. “Later in the year, we saw less cash build up for a rainy day and more opportunistic refinancing.”

With 2021 already bringing surprises at every turn, who knows what story the data will tell this year.

The full report is available for download here.

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