The Use of Markets for Long-Term Finance
KEY MESSAGES
- Long-term finance for firms through issuances of equity, bonds, and syndicated loans has grown significantly since 1991. The aggregate amount raised through these instruments increased 5-fold in high-income countries and 15-fold in developing countries in real terms.
- The growth in long-term markets has been driven mainly by debt markets (syndicated loans and corporate bonds), which account for 80 percent of the total amount raised.
- Not all firms raise long-term finance through equity or bond markets. Only a few very large firms do so, and only the largest and oldest ones issue debt at the long end of the maturity spectrum. Because firms in developing countries tend to be much smaller, a smaller proportion of developing-country firms taps these markets.
- For the set of firms that do access debt markets, those located in developing countries do not issue at shorter maturities than the ones located in high-income ones. This is partially driven by differences between financial and nonfinancial firms and by the type of projects financed.
- International markets seem to play a key role in the provision of long-term finance for firms in developing countries. The larger share of their capital raised at the long end of the maturity spectrum takes place through international issues. Domestic debt markets remain highly underdeveloped in most of the countries.
- The global financial crisis of 2008–09 hit debt markets particularly hard. Because banks from high-income countries were at the center of the crisis, syndicated lending originating in those countries experienced the largest drop, and financial firms experienced a sustained fall in corporate bond issuances. Developing-country firms were especially affected by the crisis because foreign borrowing represented nearly 100 percent of their total debt raised through syndicated loans.
- After the crisis corporate bonds and domestic syndicated loans in developing countries expanded, but these increases remained concentrated in very few countries and, thus, did not typically compensate for the drop in long-term credit provided by international syndicated loan markets.
- To broaden access to long-term finance beyond the small group of large firms and to reduce the reliance of those with access to international markets on those markets, developing countries should further develop their domestic markets by addressing market failures and policy shortcomings. In particular, a stable macroeconomic environment, institutional stability, the development of a domestic financial system, and the development of government bond markets (that do not crowd out the private sector) seem to aid the development of domestic markets.
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RELATED LINKS
- Cortina, Juan Jose, Tatiana Didier, and Sergio Schmukler. 2015. “How Long Do Corporates Borrow? Maturity of Bond and Syndicated Loan Issuances.” Working Paper, World Bank, Washington, DC.
- Didier, Tatiana, Ross Levine, and Sergio L. Schmukler. 2014. “Capital Market Financing, Firm Growth, and Firm Size Distribution.” NBER Working Paper 20336, National Bureau of Economic Research, Cambridge, MA.
- Didier, Tatiana, and Sergio Schmukler. 2013. “The Financing and Growth of Firms in China and India: Evidence from Capital Markets.” Journal of International Money and Finance 39 (1): 111–37.