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Which markets provide long-term finance?

Sergio Schmukler's picture

This post is part of a series highlighting the key findings of the Global Financial Development Report 2015 | 2016: Long-Term Finance. You can view the entire series at gfdr2015.

Many governments are concerned about providing long-term finance for corporations. In fact, having access to long-term funds allows firms to finance large investments as well as to reduce rollover and liquidity risks and the potential for runs that could lead to costly crises. Moreover, “short-termism” explains several well-known financial crises in both developing and developed economies. But to what extent do corporations borrow long term? And in which markets?

To help understand whether firms from different countries access short- and long-term financing, Chapter 3 of the Global Financial Development Report (GFDR) 2015 and the respective background paper (Cortina, Didier, and Schmukler, 2015) document the use of equity, bond, and syndicated loan markets by firms from around the world between 1991 and 2013.

This research shows that the growth in long-term markets has been driven mainly by debt markets (bonds and syndicated loans), which accounted for 80 percent of the total amount raised. For the set of firms that do access debt markets, those located in developing countries do not issue at shorter maturities than those located in high-income countries. This is partially driven by differences between financial and nonfinancial firms and the type of projects financed.

But not all firms raise long-term finance through these markets. Only a few, very large firms do so, and only the largest and oldest ones issue debt at the long end of the maturity spectrum. Because developing-economy firms tend to be smaller in size, a smaller proportion of firms are able to access these markets. Therefore, the larger proportion of SMEs in these countries have fewer alternatives when they need external finance to make use of investment opportunities and have to rely, at least for a while, on other instruments such as bilateral loans.

International markets seem to play a key role in the provision of long-term finance for firms in developing countries. The larger share of their capital raised at the long end of the maturity spectrum takes place through international issues. Domestic debt markets remain highly underdeveloped in most of the countries. Because developing-economy firms rely on international capital markets to raise funds at the long end of the maturity spectrum, they have to overcome an apparently even larger minimum size requirement than those firms that use domestic markets to obtain longer-term funds. That is, while international markets support larger issuances (which are the ones demanded by global underwriters and investors), only the largest firms can access them. This implies that only a very small proportion of developing-country firms have access to long-term finance.

The global financial crisis of 2008–09 hit debt markets particularly hard. Because banks from high-income countries were at the center of the crisis, syndicated lending originated in those countries experienced the largest drop and financial firms experienced a sustained fall in corporate bond issuances. Developing-country firms were especially affected by the crisis because foreign borrowing represented nearly 100 percent of their total debt raised through syndicated loans. After the crisis corporate bonds and domestic syndicated loans in developing countries expanded, but these increases remained concentrated in just a few countries and, thus, did not typically compensate for the drop in long-term credit provided by international syndicated loan markets.

Reference

Cortina, Juan Jose, Tatiana Didier, and Sergio Schmukler. 2015. “How Long Do Corporates Borrow? Evidence from Capital Raising Activity” Working Paper, World Bank, Washington, DC.

 

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