OREANDA-NEWS. Bonds accounted for almost 40% of total new debt taken up by European companies in the first six months of 2015 but the economic importance of debt capital markets to large corporates is twice as high, says Fitch Ratings in its latest European Corporate Funding Tracker report.

Bond issuance as a share of total new corporate funding nudged up to 39% from 37% in 2014 and is significantly above the 30% annual average for 1999-2013. This extends the trend of funding disintermediation that has become more firmly established in the region, and which mirrors the US model of corporate funding where bonds are favoured over bank loans.

Bonds have taken a rising share of corporate debt since the global financial crisis, and now account for an average of 82% of the total debt of large-cap western European corporates, measured by balance sheet data of 227 companies analysed by Fitch. Hybrid issuance has also continued to grow, with the recent USD6.5bn deal by BHP Billiton the largest hybrid issue on record.

Loose post-crisis monetary policy has helped make bonds a low-cost funding option. The potential for non-financial corporate bonds to be added to the ECB's purchase programme has extended the support for European bonds.

In contrast, the ECB's EUR400bn Targeted Long-Term Refinancing Operations (TLTROs) are so far failing to provide the intended stimulus to EU bank loan growth. The stock of bank lending to eurozone companies has remained flat over the past year, with banks instead mainly using the proceeds to refinance similar ECB funding from 2011-2012. Banks' intermediation role appears to be diminishing with them failing to effectively forward these centrally distributed funds to the real economy.

With weak economic growth likely to continue across Europe in 2016, we expect corporates to reduce risk to their balance sheets by cutting capex and shareholder returns. However, we also expect consolidation of fragmented industries through M&A as companies search for growth and attempt to reduce costs.

The full report, "European Corporate Funding Tracker" is available at www.fitchratings.com.