GFDR 2015 Lo Long-term Finance Cha hapt pter 3: Th The Use of - PowerPoint PPT Presentation

GFDR 2015 – Lo Long-term Finance Cha hapt pter 3: Th The Use of Markets for Long ng-term Fina nanc nce GFDR SEMINAR SERIES FEBRUARY 24, 2015

Introduction Lack of long-termfinance: importantand challenging concernin many countries  Short-termismcan hamper developmentand can explain several financial crises  After the global crisis, more prominence in the policy discussions  Despite its bad reputation,short-termdebtalso has its purposes  Monitoring: agency problems, risk, inadequate regulations and institutions,etc.  Maturity structure: tradeoff betweencreditorsand debtorsin how to allocate risk  Long-term debt: shifts risk to creditors (bear fluctuations in probability of default, loss  given default, and other factors) and requirea premium to hold this debt Short-termdebt: shifts risk to debtors,forces them to rollover debtconstantly  For the country as a whole,it is not clear that long-termdebt is optimal given price  Still, do not know wheredifferentcountries stand in use of short- and long-termdebt 

Introduction Comprehensive documentation on the use of key markets by firms in many countries  Equity,bonds, syndicated loansduring1991-2013  1. Which markets do firms use to access longer-term funds? How have those evolved? 2. Which firms access these markets? How many firms use long-termmarkets?  Which firms attributesare related to access?  Are longer-termissuersdifferent?  Are there differences betweenfirms fromhigh-income and developingcountries?  3. Are there differences in long-term finance provided by domestic and int’l markets? 4. How did the global financial crisis affect the main trends on each of these markets?

Data Data coverage for capital raising activity from SDC Platinum  1991-2013  39 high-incomecountries  33 developingcountries  533,482 issuances  Balance sheet data for publicly listed firms from Bureau van Dijk’s Orbis  2003-2011  51 countries(31 high-income; 20 developingcountries)  45,527 firms  Other sources: Financial Development and Structure database and WDI database 

Data Many dimensions of the data  1. By instrument : equity, bonds, syndicated loans 2. By volume 3. By market : domestic, international 4. By borrowing country : high-income, developing 5. By lender country/region : Asia, Europe, U.S., …. 6. By borrowing firm : financial, non- financial (manufacturing, construction, trade, ….) 7. By borrowing firm attribute : issuer/non- issuer, size, age, …. 8. By use : project finance, refinancing, …. 9. By currency : domestic, foreign 10. By year : 1991, …., 2013 11. By maturity at issuance : 1yr, 2yr, ….

Country Classification Australia and Eastern Europe and Latin America and Africa Oceania High-income Asi sia Central Asia Developing Asi sia Caribean Middle East st Western Europe China Egypt Australia* Hong Kong* Bulgaria Indonesia Argentina Bahrain* Austria* India Morocco New Zealand* Japan* Croatia* Malaysia Bolivia Israel* Belgium* United States* Nigeria Singapore* Czech Republic* Pakistan Brazil Jordan Cyprus* South Africa Taiwan* Hungary* Philippines Chile Kuwait* Denmark* Tunisia Kazakhstan Sri Lanka Colombia Oman* Finland* Poland* Thailand Costa Rica Qatar* France* Romania Vietnam Ecuador Saudi Arabia* Germany* Russian Fed El Salvador Utd Arab Em* Greece* Slovak Rep* Mexico Iceland* Turkey Panama Ireland-Rep* Ukraine Peru Italy* Venezuela Luxembourg* Netherlands* Norway* Portugal* Slovenia* Spain* Sweden* Switzerland* United Kingdom*

Main Findings 1. Long-term financing for firms through the issuance of equity, bonds, and syndicated loans has grown rapidly between 1991 and 2013 Increased 5-fold in high-incomecountries, 15-fold in developingcountries  Still much larger in high-incomecountries  2. Although equity market financing increased during this period, the growth in long-term financial markets has been mostly driven by debt markets Corporatebondsand syndicated loans  80% of the total amountraised per year by firms  3. Only few, very large firms access long-term finance through equity or bond markets Only the largest and oldest ones issue at the long-end of the maturity spectrum 

Main Findings 4. Firms located in developing countries do not issue more short-term debt than those located in high-income countries: the average maturity is similar 5. International markets seem to play a key role in the provision of long-term finance For firms located in developingcountries  Importantfor size and for maturity  6. The global financial crisis of 2008-2009 hit debt markets particularly hard Especially the syndicatedloans originated in high-income countries  7. Domestic markets of corporate bonds and syndicated loans in some developing countries expanded rapidly during and after the crisis years In particular in China and India  This growth did not compensate for the lack of long-term financing used to be  providedby internationalmarkets

Sections Financial markets and long-term finance  Domestic and international markets  Global financial crisis: evidence on bonds and syndicated loans  Conclusions 

Financial Markets and Long-term Finance Literature on the importance of well-developed financial markets for economic growth  Size of the markets  Does not examine the activity in primary markets nor differentiates between short-  and long-termfinancing Scarcework on connection between primary marketsand growth at micro-level  This section  Systematic evidenceon the role played by a broad set of markets in many countries  Distinguishesthe financingat differentterms  Provides evidence on howbroad the use of capital markets at differenttermsis  Association between the use capital markets and firm characteristics 

Financial Markets and Long-term Finance Total Amount Raised in Equity, Corporate Bond, and Syndicated Loan Markets High-income Countries

Financial Markets and Long-term Finance Total Amount Raised in Equity, Corporate Bond, and Syndicated Loan Markets Developing Countries

Financial Markets and Long-term Finance Equity could play complementary role  Informationalrole  Increases leveragecapacity of firms  Syndicated loan financing  The most rapidly growingmarket up to the global financial crisis  Similar to corporate bonds in terms of size and maturity  Less costly than bonds in terms of origination fees, more discrete finance, special  importance for developingcountry firmswhich haveless developed capitalmarkets Still, surpassed morerecently by corporate bondsand sensitive to crises 

Financial Markets and Long-term Finance Number of Firms Issuing Average Number of Issuers per Year Issuing Region\Market Equity Bonds S. Loans A. Median Country High-income Countries 19 22 10 Developing Countries 8 6 6 B. Pooled Data by Country/Region United States 1,277 1,220 1,916 China 217 127 62 India 319 83 70 Africa 32 8 18 Australia and New Zealand 650 103 102 High-income Asia 681 494 853 Eastern Europe and Central Asia 69 54 89 Developing Asia 247 122 84 Latin America and Caribbean 110 270 69 Middle East 46 15 40 Western Europe 854 799 627

Financial Markets and Long-term Finance Number of Firms Issuing Average Number of Issuers per Year per Country – by Period ■ Number of Equity Issuers ■ Number of Bond Issuers ■ Number of Syndicated Loan Issuers

Financial Markets and Long-term Finance Firm Characteristics High-income Countries Shorter-Term Longer-Term Non-issuers Equity Issuers Bond Issuers Bond Issuers Total Assets ($ mill) 123.4 246.2** 1,406.7*** 6,739.8*** Sales ($ mill) 114.8 1,140.1** 295.2*** 2,569.5*** Number of Employees 225 344*** 948*** 5,521*** Asset Growth 3.6% 8.5%*** 8.9%** 6.7%*** Sales Growth 4.2% 8.8%*** 5.7%** 5.5%** Employee Growth 0.7% 4.9%*** 5.0%*** 3.2%*** Leverage 49.4% 52.2%*** 57.3%*** 62.5%*** Long-term Debt/Total Liabilities 16.7% 21.0%*** 29.7%*** 39.1%*** ROA 3.1% 2.7%** 1.3%*** 3.9%** Firm Age (in 2011) 23 17*** 20** 32** Number of Firms 16,857 11,516 1,166 2,587 Percentage of Total Firms 56.27% 38.44% 3.89% 8.6% No. of Observations for Total Assets 119,001 81,949 8,984 20,022

Financial Markets and Long-term Finance Firm Characteristics Developing Countries Shorter-Term Longer-Term Non-issuers Equity Issuers Bond Issuers Bond Issuers Total Assets ($ mill) 66.0 191.2*** 866.7*** 2,027.3*** Sales ($ mill) 49.6 111.8** 257.9*** 744.1*** Number of Employees 498 814** 3,750*** 2,777*** Asset Growth 4.3% 13.1%*** 12.3%*** 11.4%*** Sales Growth 7.6% 10.5%*** 13.9%*** 11.7%*** Employee Growth 1.6% 4.2%** 4.3%** 4.5%** Leverage 47.3% 51.2%** 57.8%*** 59.1%*** Long-term Debt/Total Liabilities 11.8% 20.9%*** 30.7%*** 42.0%*** ROA 4.1% 4.6%** 5.0%** 4.8%** Firm Age (in 2011) 30 21*** 25** 35** Number of Firms 10,328 4,682 558 688 Percentage of Total Firms 66.3% 30.1% 3.6% 4.4% No. of Observations for Total Assets 69,650 31,579 4,262 5,150

Financial Markets and Long-term Finance Maturity Structure: Corporate Bonds Cumulative Distribution Function (CDF) Average Maturity Type of Country (i) Median (ii) Pooled Data 6.7 7.2 High income Developing 7.2 7.8