OREANDA-NEWS. February 16, 2015. Fitch Ratings says in a new report that the proportion of new European corporate funding accounted for by bonds has shrunk for the second year running as banks are increasingly keen to lend, supported by continued loose monetary policy.

Total new debt (bonds and syndicated loans) rose 3% to a post-crisis record of EUR1.075trn in 2014, according to Dealogic data. Bonds accounted for 39% of total new debt, down from 43% in 2013. While over the year in total bond issuance contracted by 6% to EUR419bn and loans expanded by 9% to EUR656bn , volumes in 4Q14 were unusually weak, especially for loans which hit their lowest level since 3Q09. This trend has continued into 2015, with year-to-date bond and loan issuance at their lowest levels since 2010 and 2011, respectively.

Total new debt raised is less than three-quarters of the 2007 high of EUR1.5trn when loans accounted for a record 84%. This gap may reflect the fragile nature of Europe's economic recovery, with the corporate sector investing only cautiously in view of deflationary pressures. While companies are facing a 2015 funding landscape of ample and low cost debt from bond investors and bankers alike, demand will mainly come from refinancing and M&A rather than from capex needs.

Oil & gas and energy & utility companies drove the main sector change in 2014 as they reduced bond issuance, reflecting lower expansionary capex in the wake of the sharp fall in oil prices. The former sector's issuance was down by one third, and the latter's by one quarter. By contrast, telecom and healthcare issuance grew strongly amidst ongoing in-market consolidation. Loan volume trends were in line with all these bond market sector trends.

On a regional basis, eurozone periphery corporate bond issuance contracted - 21% for Spain, 10% for Italy - reversing the trend of bond investors stepping in to fill the gap from retreating lenders. Loans to companies in this region were up marginally on balance - up strongly in Greece, Ireland and Portugal; 5% in Spain; but down 17% in Italy. In Europe's three largest economies - Germany, France and the UK - corporates boosted funds by 16% in aggregate, spread across bonds and loans in all three countries.

Issuance by Central and Eastern European companies was down by around EUR70bn compared to 2013 (bonds and loans combined). Russia accounted for more than half this shortfall. Geopolitical risks, domestic currency devaluation and slower growth will affect emerging-market issuers to varying degrees this year.

The telecoms, pharmaceutical, building materials and utilities sectors will see continued structural rebalancing in 2015. Together with the drive to boost revenues in a slow growth environment, this will lead to an increase in the level of strategic M&A activity in the near-term - likely to be funded through a mix of new bond issuance, bridge financing and equity. M&A will have varying rating implications for different sectors. For pharmaceuticals, it is the main driver behind our negative sector rating outlook. For telecoms, consolidation is the main driver behind the rating outlook moving to stable from negative.

The full report, 'Corporate Funding Disintermediation 1Q15' is available at www.fitchratings.com or by clicking the link above.