In the pandemic era of haves and have-nots, the big are getting bigger across global credit markets like rarely seen before.
Companies with annual revenues above $1 billion dominate corporate borrowing now more than any time in at least a decade, according to the Bank for International Settlements. These firms account for 78% of global issuers of dollar bonds so far this year, according to data compiled by Bloomberg.
While their bigger peers are setting records for blockbuster deals at historically low rates, many smaller companies are getting muscled out or losing access altogether. Tighter financing conditions and falling revenues raise the specter of a fresh wave of bankruptcies that could imperil the economic recovery.
“Led by easier access to bond markets, large firms significantly increased their borrowing,” BIS researchers Tirupam Goel and José María Serena wrote this month in a report about credit during the COVID-19 crisis. “The rest of the firms faced bottlenecks due to their reliance on a strained syndicated loan market and hurdles in switching to bond markets.”
There are lots of reasons why the riches of quantitative easing programs aren’t being enjoyed equally. For one, investors want the safety of stable, blue-chip companies in a recession. Although the Federal Reserve is taking unprecedented steps to help smaller companies and buying their debt for the first time, many of the neediest remain outside its reach.
The disparity underscores the lopsided economic recovery as the pandemic intensifies long-standing issues of inequality. Researchers at Princeton University and the University of Chicago found that a decline in the long-term interest rate leads to “more concentrated markets” by encouraging market leaders to borrow relative to followers, and inhibits “aggregate productivity growth.”
The trend echoes the aftermath of the global financial crisis, when banks also pulled back funding to small- and medium-sized companies. A decade of balance sheet repair has made banks much healthier now than then; yet it’s also made them more risk-averse as they prepare for a wave of loan defaults, according to the BIS report.
At the same time, lenders have been forced to accommodate $1 trillion of drawn credit lines by companies struggling to stay afloat at the height of the pandemic, according to the BIS. That’s pushed them closer to regulatory capital risk limits.
“Although the current crisis did not originate in the banking sector, banks seem to be pulling in their horns as their lending capacities have been hit, and a dim economic outlook has made them more cautious,” according to the BIS. — Bloomberg