The Rise of Bond Financing in Europe

In the Euro Area, the share of corporate borrowing coming from bond markets doubled since 2000 at the expense of bank lending. We use micro-level evidence from European public firms to dissect the steady rise of bond financing and document a number of potential risks behind the expansion, some of which came to light in spring 2020. There is a constant stream of firms entering the bond market for the first time which are significantly smaller and less profitable than historical issuers, but have comparable levels of leverage. New issuers expand their balance sheet, instead of just repaying bank loans. A shift toward bond financing is not without risk: the majority of firms facing a credit rating downgrade in 2020 crisis are small firms that entered the bond market after 2012. In light of the recent turmoil, our findings support broadening lender-of-last resort policies to include the corporate bond market.