OECD/World Bank March 7, 2002 THE CORPORATE BOND MARKET IN EUROPE

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1 OECD/World Bank March 7, 2002 THE CORPORATE BOND MARKET IN EUROPE

2 I. Why has this market increased so rapidly? Two external factors have created favourable conditions: A low interest rate environment. The introduction of the euro as a single currency and the gradual implementation of a Single market for financial services.

3 On the investor side The investor s behaviour has been driven by: The disappearance of currency exposure. The implementation of European directives relating to financial services. The improvement of trading and clearing conditions for debt securities in Europe. Furthermore, this trend has been reinforced by the collapse of the equity market, which has led investors to reallocate their assets from equities to bonds.

4 On the issuer side Issues have been driven by: Increase in M & A activities. Pressure to improve returns and shareholders value. Issuers desire to be less dependent on their own banks or to diversify their creditors base. Furthermore, this trend has been facilitated by banks which have been prompted to use theirs balance sheets more efficiently in order to increase their return on equity.

5 II. Overview of the European corporate bond market in 2001: figures Growth of the Euro denominated market: The total amount of capital raised by European corporates in all currencies through the debt market grew in 2001 by 14.6 per cent to the equivalent of 230 billion. Corporates moved away from US dollar denominated issues and the Euro denominated market matured in depth and breath. Euro denominated issues increased by 62.4 per cent to 160 billion while US dollar denominated issues fell by more than half from 60 billion in 2000 to 23.6 billion in The 5-year tenor remained the most popular maturity for corporate issuers.

6 II. Overview of the European corporate bond market in 2001: figures Issues in 2001 remained dominated by the telecom sector The telecom sector consolidated its leadership position accounting for 31% of the total issuing volume. Nevertheless in 2000 the telecom sector represented 47%. In 2001 the telecom sector companies issued 30 billion less than in The automobile sector, which in terms of market share was the second sector, accounted for 16% in 2001 as against 12% in 2000.

7 Key phenomena Three key phenomena should be noted: The confirmation of the decline of non-rated issues (4% in 2001 as against 6% in 2000). Lower rated corporates represented an increasing share of issuance. European corporates rated BBB+ accounted for 28% of total European corporate issuance in 2001 as against 16% in The high-yield segment had a difficult year with activities decreasing abruptly after september 11.

8 III. Key issues Financial information: the necessity for an «appropriate information» Bond pricing methodology Volatility of the market

9 Financial information : the necessity for an «appropriate information» The European directive relating to information which must be disclosed by a company making a public offering of securities, with or without listing on a regulated market is based on the IOSCO Principle 14. There should be full, timely and accurate disclosure of financial results and other information that is material to investor s decisions.

10 a/ Legal information requirements: the French case In France, the information which must be disclosed by listed companies (for bond or equity) can be classified in three types: Information prior to a financial operation. Periodic information which relates to the publication of financial statements. Price sensitive information. These requirements should help investors to form a judgement on the general situation and evolution of a bond issuer. Nevertheless some issuers have experienced difficulties in meeting these requirements, especially foreign or unlisted issuers.

11 b/ the growing use of rating Portfolio managers attach more and more importance to rating. This is also a form of benchmarking for investors in European companies. However ratings should be considered to be supplementary information rather than a substitute for legal requirements. Rating triggers appeared more frequently on the bond market last year. these rating triggers must not be confused with covenants.

12 Bond pricing methodology How is the spread determined? A corporate bond is not really a speculative instrument (except for high yield or distress bond). There is no centralised market reporting quotes or trading prices. The corporate bond market is, like the bond market in general, an OTC market. There are two implications: The price of a bond on the stock exchange no longer reflects supply and demand. Investors can have difficulties in estimating the valuation of a bond. Some governments have been very keen to see the establishment of alternative trading systems. However these systems are essentially dedicated to government bonds.

13 Volatility of the market The volatility of the bond market has become more noticeable. However it is relatively small when compared with that of the equity market. Trading performance of issues has been influenced by both credit events (i.e. 3G licence auctions) and the success of individual deal execution. Volatility is especially high among low rated issuer. Finally, volatility has been reinforced by the existence of rating triggers.

14 Conclusion The euro denominated corporate bond market has grown rapidly during the past few years. It has shown a remarkably large capacity to absorb enormous issues. However the European bond market is still much smaller than that of the US. The outlook for the corporate bond market this year looks positive as: Market conditions such as swap spreads should remain relatively tight. Strong demand factors are still in place. There is a growing use of debt capital markets as a diversified funding source. Issuers have succeeded in obtaining improved funding conditions. However they do have new responsibilities and obligations.

15 Patrice Aguesse Chargé de mission March 7, 2002

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