The Shifting Sands of Corporate Credit: How Firms Are Funding Their Growth

Firms' access to credit is the lifeblood of their operations, impacting decisions about investment, hiring, and overall growth. While we often think of credit availability in broad terms, in reality, firms have access to a diverse range of borrowing markets, each with its own unique conditions. A recent note by the economists of the New York Fed delves into the evolving landscape of corporate debt, revealing a fascinating shift in how companies are securing funding.

A Diverging Path for Bank and Bond Markets

The post highlights a key observation: conditions in the corporate bond market aren't always aligned with bank lending standards. According to the authors, bond market conditions tend to react more swiftly to both economic downturns and anticipated monetary policy changes. This suggests that firms primarily relying on bank loans experience a different credit cycle than those funding through public debt markets.

The Rise of Bank-Intermediated Credit

Analyzing data from Capital IQ, the authors find that the share of credit intermediated by banks for non-financial U.S. firms is on the rise. This trend might seem counterintuitive given the well-documented expansion of the corporate bond market. However, a closer look reveals that while firms with access to both loans and bonds are increasingly turning to public debt, the overall increase in bank-intermediated credit is driven by a growing number of firms solely relying on bank loans.

Smaller Firms Leading the Bond Market Embrace

Further analysis reveals that this trend of increasing reliance on bonds is particularly pronounced among smaller firms. While large firms maintain a relatively stable share of bank-intermediated credit, smaller firms with access to both markets are increasingly opting for bond financing. This suggests that smaller firms are finding it more advantageous to access the bond market, potentially due to factors like lower borrowing costs or greater flexibility.

Shortening Maturities: A Sign of Frequent Refinancing

The note also examines the maturity composition of corporate debt, highlighting a significant trend of shortening maturities for corporate bonds. This suggests that firms are increasingly exposed to the volatility of credit market conditions as they need to refinance their debt more often. In contrast, bank loan maturities have generally decreased since the Global Financial Crisis, suggesting a shift towards shorter-term borrowing.

The Macroeconomic Implications

The changing landscape of corporate debt has broader macroeconomic implications. As firms increasingly rely on the corporate bond market for funding, they become more sensitive to fluctuations in bond market conditions. This can impact the overall economy, particularly during periods of economic stress. The authors note that the composition of corporate debt, combined with the structure of the financial sector, plays a crucial role in the transmission of monetary policy and other macroeconomic shocks.