Since the global financial crisis of 2007–08, aggregate data suggests that nearly all of the £425 billion net increase in UK corporate debt has come from market-based finance (MBF). MBF can diversify funding sources and reduce the likelihood that funding becomes unavailable to corporates. But it can also introduce additional vulnerabilities. Crystallisation of risks in MBF markets could amplify economic shocks and disrupt the provision of finance to UK corporates. This article examines the different forms of MBF debt that companies use and the reasons they use them.
Bank staff have constructed a new bottom-up issuance level data set to examine this. The totality of this data set comprised of around 10,000 deals sourced from different types of MBF debt including bonds, syndicated loans and private credit. This data set also comprised of a number of parameters such as deal date, tenor and issuance purpose. It contains information on what the issuers say they intend to use the finance for.
This data set suggested that syndicated loans and bonds make up over 75% of aggregate corporate MBF debt, with the rest split between leveraged loans, private credit and commercial paper (Chart 1).
Chart 1: A large proportion of UK corporates’ MBF debt is from syndicated loans and bonds
Companies tend to say they are issuing bonds for operational purposes (eg staff salaries and pensions) and refinancing of debt, while they raise private credit largely for acquisitions and disposals activities. They raise syndicated loans for a variety of reasons including investment (mostly not through leveraged loans), operational purposes, refinancing, and for acquisitions and disposals activities (mostly through leveraged loans) (Chart 2).
Chart 2: Corporate bonds are generally raised for operational purposes or refinancing, while private credit is raised predominantly for acquisitions and disposals
UK corporates’ MBF debt by purpose (a) (b) (c) (d)
Footnotes
- Sources: LSEG Eikon, Preqin, and Bank calculations.
- (a) The main reasons of issuance are grouped based on reported data and organised by the debt type, notably by – investment-grade bonds, high-yield bonds, unleveraged syndicated loans, leveraged syndicated loans and private credit. To calculate the stock of private credit the average maturity of private credit is assumed to be five years.
- (b) Certain subsidiaries of consolidated groups may be included in the number for the group and separately.
- (c) Commercial paper is excluded as it is generally short-term debt and represents a small proportion of UK corporate MBF debt.
- (d) Data quality on the purpose of issuance varies across data bases and prevent us from doing further interrogation. For example, the role of MBF debt used to finance investment could be understated due to data quality reasons.
Over the next five years, around 50% of UK corporates’ MBF debt stock is set to mature, of which around a quarter (24%) was issued for operational purposes and refinancing, and just over 10% for investments, and for acquisitions and disposals respectively (Chart 3).
Chart 3: Almost a quarter of UK corporates’ MBF debt maturing in the coming five years was issued for operational purposes and refinancing
MBF debt maturity by purpose (a) (b) (c) (d)
Footnotes
- Sources: LSEG Eikon, Preqin and Bank calculations.
- (a) The main reasons of issuance are grouped based on reported data and organised by the debt type, notably by – investment-grade bonds, high-yield bonds, unleveraged syndicated loans, leveraged syndicated loans and private credit. To calculate the stock of private credit the average maturity of private credit is assumed to be five years.
- (b) Certain subsidiaries of consolidated groups may be included in the number for the group and separately.
- (c) Commercial paper is excluded as it is generally short-term debt and represents a small proportion of UK corporate MBF debt.
- (d) Data quality on the purpose of issuance varies across data bases and prevent us from doing further interrogation. For example, the role of MBF debt used to finance investment could be understated due to data quality reasons.
Certain debt, such as debt raised for operational and refinancing purposes is more likely to require regular refinancing. If companies are unable or unwilling to refinance this debt at market prices, they may take defensive actions such as reducing investment or employment, impacting the real economy.
This post was prepared with the help of Lara Aboueldahab, Neha Bora and Sarah Burkinshaw.
This analysis was presented to the Financial Policy Committee in 2024 Q2.
Share your thoughts with us at BankOverground@bankofengland.co.uk
