The extent to which firms borrow short versus long term has generated much interest in policy and academic discussions in recent years. For example, concerns of a shortage of long-term investment in the corporate sector have led several institutions to promote policy initiatives aimed at extending the maturity structure of debt, which is often considered to be at the core of sustainable financial development (World Bank, 2015). There is also evidence that more short-term debt increases around financial crises, both as a cause and as a result of financial instability. However, there is little evidence on the actual maturity at which firms borrow around the world.
In a new working paper (Cortina, Didier, and Schmukler, 2016), we study how firms in developed and developing countries have used the expansion in different debt markets (domestic and international bonds and syndicated loans) to obtain finance at different maturities, and how their borrowing maturity evolved during the global financial crisis of 2008–09.
We find that different markets provide financing at very different terms and that firms actively switched markets during the crisis, compensating the decline in international bank financing by issuing more bonds and (in the case of developing countries) more domestic loans. These switches across markets had significant effects on the maturity structure of countries and firms. In particular, firms that switched markets were able to maintain their borrowing maturity, even when the maturity in each market declined (as usually witnessed during crises). Therefore, the evidence suggests that access to several markets has allowed some firms to use them as complements during good times, obtaining different types of financing in each, and as substitutes when conditions deteriorate, cushioning the decline in volume in certain markets and in maturity across all individual markets.
The findings from this paper imply that, when firms obtain financing from different sources, it is important to analyze these different types of financing jointly. While the study of domestic and foreign bond and syndicated loan financing to firms is by no means complete (firms have other debt financing options), our work shows that firms could use these markets as complements to the extent that they provide financing at different terms. For example, bonds seem to be better instruments than bank loans for longer-term financing, while banks might cover the shorter-term financing needs.
Moreover, having access to different markets might allow firms to compensate for fluctuations in particular markets by raising funds elsewhere, as happened during the global financial crisis when bond markets provided to some degree the “spare tire” function advocated for capital markets. The substitutions that happened across markets during the global financial crisis seem to have materially impacted the maturity structure, mitigating (to some extent) the risk of debt and foreign currency financing in particular. These effects are difficult to observe when studying the dynamics within only one market or when using just balance sheet information. Lastly, access to different markets has allowed some large firms from developing countries to obtain financing at fairly long term.
Cortina, Juan Jose, Tatiana Didier, and Sergio Schmukler, 2016. “How long is the maturity of corporate borrowing? Evidence from bond and loan issuances across markets” World Bank Policy Research Working Paper 7815.
World Bank, 2015. “Long-term finance.” Global Financial Development Report.
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