firms’ financial soundness and access to capital...anglogold ashanti holdings plc anglogold...

INTERNATIONAL AFFAIRS

Firms’ Financial Soundness and Access to Capital

Markets. Evidence and Data Issues

Alberto Fuertes (Banco de España)

José María Serena (Banco de España)

TWELFTH ESCB EMERGING MARKETS WORKSHOP

LAPLAND, 10TH DECEMBER 2014

*THIS PRESENTATION IS THE EXCLUSIVE RESPONSIBILITY OF THE AUTHOR AND DOES NOT

NECESSARILY REFLECT THE OPINION OF BANCO DE ESPAÑA, OR THE EUROSYSTEM.


OUTLINE

1. Motivation

2. Data issues. Database on bond issuances and firms’ balance-sheets

3. Firms’ access to international markets

4. Further research and work ahead

[Appendix. Other results]

2


MOTIVATION

• International markets transition towards market-based financing. Financial disintermediation and search for yield stand as drivers.

• The process is attracting attention, not least since leverage/vulnerabilities seem to increase in emerging economies non-financial corporations (IMF (2014 A, 2014 B)), FSB-SCAV (2014)

FINANCIAL DESINTERMEDIATION AND LEVERAGE

0.0

0.5

1.0

1.5

2.0

2.5

0

50

100

150

200

250

2009 2010 2011 2012 2013

NON-BANK INTERNATIONAL ISSUANCES NET DEBT TO EARNINGS (Right-hand scale)

USD bln Net debt to earnings

SOURCE: Chui, Fender, and Suskho (2014); and BIS Debt Securities by Nationality.


MOTIVATION

• Unsurprisingly, research/analysis on bond issuances is burgeoning. New stylized facts:

•Size: large debt issuances, by nationality (Shin (2013, 2014)), McCauley, Upper and Villar (2013).

•Features: maturities are lengthening (Shin (2014), Gruic, Hattori and Shin (2014)); Dollar funding still dominates (Gruic and Wooldridge (2013))

•Regional studies: Latin America (IADB (2014))

• But many questions remain open. In particular, those related to issuers’ balance-sheet features.

• Why? They require joint information on firms’ access to capital markets, and also on their balance sheets. Hitherto, there was no such information.

4


CONTRIBUTIONS

1. Construct a database containing information on bond issuances and firms’ balance sheets.

•Our initial sample includes 13,199 bonds, issued by 2,773 firms, of 36 emerging economies, in the period 2000-2013.

•Bonds issued at international and local markets; Rated/non-rated bonds, public/private placements.

•Balance-sheet variables: leverage, ROA, interest coverage ratio, current ratio, CAPEX investment. There is information available for listed and non-listed firms.

2. Using this database, we depict firms’ access to capital markets, investigating their balance-sheets and financing conditions during the period 2000-2013.

5


DATA ISSUES. DATABASE ON BOND ISSUANCES AND FIRMS’ BALANCE-SHEETS • We collect this information in two steps: 1) obtain bond-level information on

non-financial corporations’ issuances in local and international markets, 2) for each company tapping capital markets, we get its balance-sheet information, if it is available.

• Methodological decision: Non-financial corporations bond issuances, by country of risk. Rationale: account for issuances by financial vehicles incorporated overseas.

6

Company Name Parent CompanyCountry of

Incorporation

Country of

RiskCUSIP

Amount

(USD bln)

Petrobras Global Finance BV PETROBRAS - PETROLEO BRAS-PR Netherlands Brazil 71647NAF6 3.5

Lukoil International Finance BV LUKOIL OAO Netherlands Russia EJ6431419 1.5

Gazprom Neft OAO Via GPN Capital SA GAZPROM NEFT OAO-CLS Luxemburg Russia EJ9515473 1.5

Russian Railways via RZD Capital PLC RUSSIAN RAILWAYS JSC Ireland Russia EJ6158582 1.3

AngloGold Ashanti Holdings PLC ANGLOGOLD ASHANTI LTD Isle of Man South Africa 03512TAD3 1.3

Metalloinvest Finance Ltd METALLOINVEST HOLDING CO OAO Ireland Russia EJ8456547 1.0

SABIC Capital II BV SAUDI BASIC INDUSTRIES CORP Netherland Saudi Arabia EJ8456547 1.0

EXAMPLES OF BONDS ISSUED BY FINANCIAL SPECIAL PURPOSE VEHICLES

SOURCE: Bloomberg


DATA ISSUES. DATABASE ON BOND ISSUANCES AND FIRMS’ BALANCE-SHEETS

7

•How good is our bond information? Volume issued is larger than the one obtained with Dealogic. We have unrated bonds, private placements, local and international markets (full population of bonds?)


DATA ISSUES. DATABASE ON BOND ISSUANCES AND FIRMS’ BALANCE-SHEETS

8

•How good is our balance-sheet coverage? Uneven. Very good for international deals and listed companies. Data gaps in unlisted firms, and local markets. Random sample, or systematic bias?

FIRMS'BOND ISSUANCES. BY MARKET OF ISSUANCE AND MARKET STATUS

SOURCE: Bloomberg and owns elaboration.

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

0

50

100

150

200

250

300

350

400

International, listedInternational, non-listed

Local, listed

Local, non-listed

USD bln

A. VOLUME ISSUED. BY MARKET STATUS

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

0

10

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100

% International listed % International non-Listed

% Local listed % Local non-Listed

%

B. BALANCE-SHEET COVERAGE (% OF TOTAL VOLUME)


FIRMS’ ACCESS TO CAPITAL MARKETS. INTERNATINAL MARKETS. METHODOLOGY

9

•Research question:

•How do firms tapping international bond markets in year 2013 compare [in dimension Y] with those firms issuing overseas in year X? •How are their financing conditions [bond feature Z] in year 2013 compared with those in year X?

•For Y: leverage, ROA, ICR, Current ratio; and Z: yield, spread, maturity •Methodology:

•Descriptive evidence [median, interquantile range] •Non-parametric analysis –Kernel estimation


FIRMS’ ACCESS TO CAPITAL MARKETS. INTERNATIONAL MARKETS. FIRMS’ FINANCIAL SOUNDNESS

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0.05

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0.25

0.30

0.35

0.40

0.45

1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0 5.5 6.0 6.5 7.0 7.5 8.0

2000-2007 2013

LEVERAGE SLIGHTLY DECREASES

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-20 -17 -14 -11 -8 -5 -2 1 4 7 10 13 16 19 22 25 28

2000-2007 2013

ROA SHOWS SOME DETERIORATION

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0.02

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0.08

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0.12

0.14

0.16

0 3 6 9 12 15 18 21 24

2000-2007 2013

ICR IMPROVES

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0.60

0.70

0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5

2000-2007 2013

CURRENT RATIO IMPROVES


FIRMS’ ACCESS TO CAPITAL MARKETS. INTERNATIONAL MARKETS. BOND FEATURES

11

•Bottom line:

•Firms’ balance sheet have changed, but are not more overstretched. •However, they have easier access to capital markets (consistent with previous research, Shin (2013, 2014), Turner (2014)) •Further analysis: “Pockets of Risk”, Domestic Markets, New Issuers.

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0.0 1.5 3.0 4.5 6.0 7.5 9.0 10.5 12.0 13.5 15.0

2000-2007 2013

COUPONS DECREASE

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0.12

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0.16

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14

2000-2007 2013

MATURITY INCREASES


IMPLICATIONS AND FURTHER RESEARCH • Implications:

1. Firms’ access to international markets is easier than before the crisis –coupons, tenors.

2. Process seems driven by global factors –is this a healthy development, reflecting the end of credit rationing in international markets? does it reflect a transition from global banks to markets? Is it search for yield?

3. Lenders are not exposed to more credit risk than in past; though, they are more exposed to market risk (duration).

4. Is it possible to reconcile this evidence with NFC rising leverage? other lenders, perhaps domestic banks, can suffer an adverse selection problem.

• Many questions remain open. Investigating some of them requires joint information on firms’ access to capital markets and balance-sheets.

12


IMPLICATIONS AND FURTHER RESEARCH

• Robustness. Test if these shifts are statistically significant. Stochastic dominance. Are the results general? Are there sectoral or regional patterns? Preliminary evidence

13

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1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0 5.5 6.0 6.5 7.0 7.5 8.0

EUROPE LATAM ASIA

EUROPEAN FIRMS SHOW LOWER LEVELS OF LEVERAGE

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IMPLICATIONS AND FURTHER RESEARCH • Local markets have experienced a remarkable development after the crisis.

Does it have to do with foreign investors? Are international and local markets still different, in the post crisis environment?

14

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2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

InternationalDomestic% Coverage International (Right-hand scale)% Coverage Domestic (Right-hand scale)

USD bln

BALANCE-SHEET DATA COVERAGE OF DOMESTIC ISSUERS

%


THANK YOU


APPENDIX. TAIL RISKS ON THE RISE

TAIL RISK, VOLUMES ISSUED BY WEAK FIRMS

SOURCE: Bloomberg.

a. Charts show volumes of bonds issued in international markets by weak firms. Overall, amounts issued have increased over ti me.

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2000 2002 2004 2006 2008 2010 2012

VOLUME ISSUED BY FIRMS WITH LEVERAGE ≥ 4

USD bln

VOLUMES ISSUED BY HIGHLY LEVERAGED FIRMS

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30

2000 2002 2004 2006 2008 2010 2012

VOLUME ISSUED BY FIRMS WITH LOW ROA < 0

USD bln

VOLUME ISSUED BY FIRMS WITH LOW ROA

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2000 2002 2004 2006 2008 2010 2012

VOLUME ISSUED BY FIRMS WITH LOW ICR < 1

USD bln

VOLUME ISSUED BY FIRMS WITH LOW ICR

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2000 2002 2004 2006 2008 2010 2012

VOLUME ISSUED BY FIRMS WITH CR < 1

USD bln

VOLUME ISSUED BY FIRMS WITH LOW CURRENT RATIO


APPENDIX. JOINT ANALYSIS. OVERALL, FIRMS TAPPING MARKETS ARE NOT WORSE

JOINT ANALYSIS OF FINANCIAL CONDITIONS

SOURCE: Bloomberg.

50

70

90

110

130Leverage

Debt to EBITDA

Interest Coverage Ratio

Return on Assets

Current Ratio

Capex

2000-2007 2012 2013

Larger values mean better financial conditions

FINANCIAL CONDITIONS RELATIVE TO PRE-CRISIS LEVELS

0

20

40

60

80

100Debt to EBITDA


Return on AssetsCurrent Ratio

Capex

All Firms

Firms withn 75 percentile of leverage

Firms within the 95 percentile of leverage


FINANCIAL CONDITIONS OF HIGHLY LEVERAGED FIRMS


APPENDIX. POCKETS OF RISK? NON-LISETED FIRMS HAVE MORE OVERSTRECHED BALANCE-SHEETS

0

20

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100

120Leverage

Debt to EBITDA


Return on Assets

Current Ratio

Capex

ListedNon-Listed 2007Non-Listed 2013Non-Listed Highly Leveraged 2013


RELATIVE FINANCIAL CONDITIONS OF NON-LISTED FIRMS


APPENDIX. POCKETS OF RISK? FIRMS TAPPING LOCAL MARKETS ARE WORSE –BUT BETTER THAN IN PAST

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DOMESTIC ISSUERS: COVERAGE AND FINANCIAL CONDITIONS

SOURCE: Bloomberg.

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2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

InternationalDomestic% Coverage International (Right-hand scale)% Coverage Domestic (Right-hand scale)

USD bln

BALANCE-SHEET DATA COVERAGE OF DOMESTIC ISSUERS

%

20

40

60

80

100

Leverage

Debt to EBITDA


Return on Assets

Current Ratio

Capex

InternationalDomestic 2007Domestic 2013Domestic Non-Listed Highly Lev. 2013


RELATIVE FINANCIAL CONDITIONS OF DOMESTIC ISSUERS


APPENDIX. POCKETS OF RISK? NEW ISSUERS ARE BETTER THAN EXISTING ISSUERS.

20

NEW ISSUERS: COVERAGE AND FINANCIAL CONDITIONS

SOURCE: Bloomberg.

a. New issuers within our sample (2000-2013). Red bars show the average amount issued every year (total amount issued by new issuers/number of new

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2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Average Volume by New Issuers (Right-hand scale)

Number of New Issuers

Number of firms

NEW ISSUERS OF INTERNATIONAL BONDS

USD bln

020406080

100120140

Leverage

Debt to EBITDA


Return on Assets

Current Ratio

Capex

Old Issuers New Issuers 2007 New Issuers 2013


RELATIVE FINANCIAL CONDITIONS OF NEW ISSUERS

INTERNATIONAL AFFAIRS 21

APPENDIX. BALANCE-SHEET FEATURES.

1.5

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2000 2002 2004 2006 2008 2010 2012

LEVERAGE

INTERQUARTILE RANGE MEDIAN

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9.5

11.5

2000 2002 2004 2006 2008 2010 2012

RETURN ON ASSETS (ROA)


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2000 2002 2004 2006 2008 2010 2012

INTEREST COVERAGE RATIO (ICR)


0.5

0.7

0.9

1.1

1.3

1.5

1.7

1.9

2.1

2.3

2.5

2000 2002 2004 2006 2008 2010 2012

CURRENT RATIO


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3.0

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2000 2002 2004 2006 2008 2010 2012

%

COUPON


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14.0

1999 2001 2003 2005 2007 2009 2011 2013 2015

years

MATURITY (WEIGHTED AVERAGE)

INTERNATIONAL AFFAIRS 22

APPENDIX. COUPON SPREAD.

BOND SPREAD FOR INTERNATIONAL ISSUANCES DENOMINATED IN USD

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2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013


•Spreads reached the lowest values before the financial crisis and have increased after that period. This is in contrast with yields, which reached their all-time low in 2013. •The fall on coupons does not seem to be related to lower credit risk but to global factors.


FIRMS’ ACCESS TO CAPITAL MARKETS. INTERNATIONAL MARKETS. METHODOLOGY

• Objective: investigate firms’ access to international bond markets over time, by looking at firms’ balance-sheet metrics. Comprehensive coverage for firms tapping international markets (although more representative for listed firms)…

• …and bonds features (yields, spreads, maturities).

23

OBSERVATIONS

Firms As % of amount issued

Leverage Total assets to common equity (leverage) 1,001 73.33

Profitability Return on Assets 868 65.82

Debt service capacity Interest Coverage Ratio 1,010 74.68

Long-term prospects CAPEX -capital expenditures 724 57.77

Solvency Debt to EBITDA 1,037 77.80

Liquidity Current ratio 1,052 77.32

CONCEPT VARIABLE

BALANCE-SHEET SOUNDNESS. METRICS

SOURCE: Bloomberg and own elaboration.


IMPLICATIONS AND FURTHER RESEARCH

• Robustness. Test if these shifts are statistically significant. Stochastic dominance. Are the results general? Are there sectoral or regional patterns? Preliminary evidence

24

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0.50

0.60

1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0 5.5 6.0 6.5 7.0 7.5 8.0

EUROPE LATAM ASIA

ESTIMATION FOR LEVERAGE

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-20 -17 -14 -11 -8 -5 -2 1 4 7 10 13 16 19 22 25 28

EUROPE LATAM ASIA

ESTIMATION FOR ROA

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0.12

0.14

0 3 6 9 12 15 18 21 24

EUROPE LATAM ASIA

ESTIMATION FOR ICR

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0.80

0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5

EUROPE LATAM ASIA

ESTIMATION FOR CURRENT RATIO

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