The effect of the global financial crisis on debt financing and debt maturity

On September 15, 2008 the whole world was watching in complete shock the collapse of Lehman Brothers, one of the most respected investment banks worldwide. The crisis spread immediately throughout the whole financial system and is compared by many economists with the Great Depression of the 1930s.

As a result the total amount of debt raised was reduced after crisis. Developed countries debt issuance was reduced by 40 % between 2007 and 2009.  Following the same downward trend, developing countries debt issuance experienced a decline of 15% during 2007-09. (Juan J. Cortina, Tatiana Didier, Sergio L. Schmukler, January 2018, “Corporate Borrowing and Debt Maturity:Market Access and Crisis Effects”)

At the same time:

• The corporate debt turned to bond issuances. During 2007 - 2009  the issuance of corporate bonds expanded by 52% and 96% in developed and developing countries, respectively and at the same time total borrowing in syndicated loan markets vanished by around 62% and 57% in developed and developing countries, respectively.
• Second, in developing economies firms moved towards the less affected domestic markets, increasing domestic bonds and syndicated loan markets. During 2007 - 2009, abroad syndicated loans to developing countries declined by 75 %, whereas the issuance of domestic syndicated loans increased by 104 % over the same period. For corporate bonds, the issuance in foreign markets declined by 14 % , whereas domestic issuances increased by 169 % over the same period. On the contrary, firms from developed countries tried to “move away” from the impacted syndicated loan market. This was translated into a decline in the issuance of both domestic and international syndicated loans and an increase in the issuance of both domestic and international bonds.

Debt maturity is expected to decline during a crisis because firms and finance providers adjust to higher uncertainty, risks and lower returns. Also because banks want to increase their protection and minimize their exposure, they  tighten their lending standards.

However, the results for developed countries show that even though the maturity of issuances of bonds and syndicated loans shortened in both domestic and international markets during the crisis relative to the pre-crisis period, the overall debt maturity did not significantly change. This is explained by the fact that the share of debt financing raised with bonds (which have significantly longer maturity than syndicated loans) increased. As for developing countries, the average maturity of the total new debt increased in the aftermath of the crisis. Whereas the maturity of bonds declined (by about 2 years), the maturity of syndicated loans increased (by about 3 years). The maturity of bonds declined in both domestic and international markets. For syndicated loans, however, the increase in maturity at issuance is explained by the upward tendency for issue in the longer-term domestic markets. (Juan J. Cortina, Tatiana Didier, Sergio L. Schmukler, January 2018, “Corporate Borrowing and Debt Maturity:Market Access and Crisis Effects”)

Last but not least, the markets on which each firm has access is an important factor to consider. During the crisis most of the large firms moved away from the most affected markets with shorter maturity, towards less affected ones switching their financing composition and their debt maturity remained almost stable. But firms that could not choose between markets(usually the sme’s) , and thus continued issuing in the same markets, experienced declining debt financing and maturities. This fact is really crucial since it contradicts one of the most influential theorems in economics and more specifically that “In a world with perfectly integrated and frictionless markets, the specific market in which firms obtain financing would be irrelevant”(Modigliani and Miller, 1958).

To sum up we can easily realize, that the global economic crisis had different effects on each country and each type of firm and and that different debt markets attracts different types of firms and investors, delivering different volumes and terms of financing such as debt maturity. (La Porta et al.; 1997; Karolyi and Stulz, 2003; Pirinsky and Wang, 2006; Japelli and Pagano, 2008; Bekaert et al., 2011).