So what has changed? Well the answer is obvious: the GFC and the banks tightening up on credit.
Is this answer too simplistic or is what we are observing just part of an economic cycle? And if it is the latter, should we in fact be aiming for structural change this time around?
It is too soon to answer these questions and certainly beyond the scope of this commentary but some further interesting observations can be made. Firstly, there is evidence of a certain cyclicality to true corporate bond issuance and it appears to be driven by the willingness, or lack thereof, of the banks to lend.
Over the last half of this decade our corporate bond market has increasingly taken on the appearance of a wholesale bank deposit market. In fact, true corporate bond issuance as a proportion of total outstandings has been in decline since the end of 2002, as the chart below illustrates.
However, over the period from 2000 to 2002, a recessionary period for most western economies, if not Australia, true corporate issuance was growing strongly. Bank lending to the corporate sector was constrained during this period and it was only from around mid 2003 that conditions started to change. From then, up until almost the end of 2007, financial markets were flooded with abundant liquidity, money was cheap and most of the world was a risk seeker.
There is no doubt that when credit conditions are benign and funding is plentiful and cheap, banks compete with corporate bond markets, and will happily provide debt funding to the corporate sector at a lower cost than the market is willing or able to provide.
It is interesting to contrast the Australian experience with that of Japan, as the chart below (for readers at the website) vividly shows. (Data for the US and Europe is also included for reference.)
The chart shows that in the latter part of the last decade true corporate issuers accounted for almost 40 per cent of total outstandings in the corporate bond markets of both countries.
20090720 chart for Phil
For the first three years of this decade the proportion of true corporate issuance increased in both markets but sharply diverged from there. The Australian banks became aggressive lenders while the Japanese banks continued to ration funds to the corporate sector as they struggled under a mountain of impaired loans on their balance sheets. At the same time significant rationalisation of the banking sector was under way.
The cost of debt remained cheap in Japan but the corporate sector had to look elsewhere for funding and turned to the corporate bond market. Many had learned not to rely on the banks, from their experiences after the Asian crisis. Interestingly, while this was occurring the banks were decreasing their reliance on the market and turning to deposits.
Australian corporates are now finding themselves in a situation that is similar to that faced by Japanese corporates for a decade or more now. A revival of true corporate bond issuance in the domestic market is indeed likely, as our banks deal with rising bad debts and increasing funding costs and capital requirements.
A challenge for the domestic market will be to keep that issuance here and not let it go offshore.