The business sector's transition from bank debt to debt from institutional investors: corporate access to credit

         Excerpt from the Bank of Israel Annual Report for 2018


  • Since the 2000s, a structural change has been taking place in the credit market, as the share of nonbank credit has increased relative to bank credit.  A significant part of the change is a result of direct loans from institutional investors.
  • Direct loans from institutional investors in Israel are provided at a high credit rating, mainly to private companies affiliated with the large corporations.  This credit has increased at the expense of investment in bonds.  The shift to loans is apparently also due to their characteristics, as they are nontradable and adjusted to the financing needs of income-producing real estate and infrastructure companies.
  • The expansion of credit from institutional investors to small and medium businesses is important.  The State has therefore permitted regulated credit institutions to issue bonds, mainly to the institutional investors, and has established designated investment funds.  It is recommended to also promote a regulated securitization market that will contribute to making credit more accessible.​

The expansion of nonbank financing to the business sector in Israel since the 2000s, from about 5 percent of credit to the sector in 2000 to 35 percent at the end of 2018, is evidence of a significant structural change, which is large even when compared to the international trend.  There is also a sharp increase in direct loans by institutional investors to companies. The entry of institutional investors to the corporate bond market has led to an expansion of the supply of credit, and access to credit for large corporations.  The professional literature indicates that such an expansion could lead to the relatively fast recovery of the economy after periods of economic crisis.


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It was also found that, similar to what is described in the literature, bank financing is directed toward a variety of companies, while nonbank financing through bonds is currently issued mainly to large corporations with a high credit rating.  The public companies, which enjoy access to all types of credit, are choosing to borrow through bonds. This shows the advantage of such credit for them, which is apparently due to the pricing and tradability of the bonds.

 

Direct loans by institutional investors in Israel are provided at high credit ratings, and are issued mainly to private companies.  However, it seems that a large portion of the companies receiving financing from the institutional investors are affiliated with large corporations and public companies, and obtain this credit mostly for financing infrastructure projects. The institutional investors' transition to providing direct loans makes financing from them available to more types of companies and projects.  There is a strong and statistically significant negative correlation of 0.35 between the institutional investors' holdings of direct loans and their investments in Israeli corporate bonds, which shows a shifting between the two types of debt.  The shift to loans is apparently due to the advantage of investing in direct loans, together with the institutional investors' lack of desire to increase their exposure to bonds and the limited demand for credit to the large corporations in Israel.

 

Therefore, it does not seem that the institutional investors' transition to investment through direct loans has led to an increase in access to credit for all companies, since it is mainly issued to the large corporations or to companies affiliated with the large and public companies.  The challenge of increasing access to credit from the institutional investors for small and medium businesses therefore remains.  The institutional investors' abilities to provide credit directly to small and medium businesses is limited due to significant operational costs, and because there is no developed securitization market in Israel that would allow for the expansion of credit while continuing to have it operated by the banks.


However, permitting regulated credit institutions to raise bond son the capital market, which began in 2015, enables the institutional investors to invest in credit to small and medium businesses indirectly.  The regulated institutions[1] issue bonds to the institutional investors, and lend to the businesses.  In recent years, particularly in 2018, we have seen an increase in both the volume of debt raised by regulated credit institutions (most of which was issued directly to the institutional investors) and in the volume of credit provided by the regulated credit institutions to the business sector.[2]  The increase in the credit provided by regulated credit institutions also attests to the demand by small and medium businesses for credit. 

 

The government is also acting to make credit from the institutional investors more accessible to small and medium businesses, through two investment funds established in 2016, and by providing grants to regulated credit institutions that provide credit of at least NIS 500 million.



[1] Credit institutions that are not banks or institutional investors—credit card companies and other credit institutions.

[2] We must remember that we are now seeing only part of the picture of credit from regulated credit institutions.  The increase in credit provided by the private regulated credit institutions may currently be greater.