Capital markets: why they matter for the UK economy

More than nine in 10 large UK companies regularly use the capital markets, according to a new report from BNP Paribas and New Financial, an industry think tank. These companies employ almost eight million people across the country.

Amid persistent political uncertainty and a Covid-19-induced economic shock, the finding underlines the critical importance of the capital markets in helping companies for their funding and risk-management needs – and its role in supporting the UK economy. From mid-March to end- April, as the pandemic took hold, nearly 150 UK companies raised approximately £30 billion (approx. $38 billion) in the corporate bond and equity markets.

To mark the launch of the report, “The value of the capital markets to the UK economy”, BNP Paribas UK country Head, Anne Marie Verstraeten, chaired a roundtable to go deeper into its findings.

Support for a sustainable recovery?

“The report underscores the systemic nature of UK capital markets in helping the economy,” says Anne Marie Verstraeten. The post-pandemic recovery phase is also, she believes, an opportunity to drive forward a sustainable recovery in line with the UK government’s ambition to move towards a “net zero” carbon footprint by 2050. “It is inevitable that capital markets will continue to play a fundamental role in ensuring a sustainable recovery centred on rebuilding a greener, fairer and more resilient economy.” 

” The report underscores the systemic nature of UK capital markets in helping the economy. ”

Paul Hollingsworth, Chief UK Economist at BNP Paribas Markets 360, notes that the pandemic shock to the UK economy and slow relaxation of restrictions means “the recovery phase looks likely to be drawn out, with business and consumer behaviour only slowly returning to normality.”

The Bank of England’s quantitative easing programme and a continued accommodative fiscal policy stance will “continue to play a role in helping to avoid a more significant downturn,” but continued swift and coordination action will be required to assist in the recovery, adds Hollingsworth.

Five themes in the UK capital markets

William Wright, the founder and managing director of New Financial and lead author on the report, highlighted five key themes emerging from the analysis:

1. A misperception of the capital markets, which can seem removed from the real economy for many outside the industry. Capital markets are embedded in the economy, as the report shows that over 90% of large UK companies (with revenues of more than £200m a year) are regular users of capital markets. 
   
   
2. Capital markets are vital for many UK companies – some 1,000 large companies and 14,000 companies with revenues of less than £200m a year accessed the capital markets to finance, invest or manage risk in their businesses. 
   
   
3. Systemic impact within the UK economy – between them these companies accessing capital markets employ eight million people across the UK, representing 25% of UK workforce. 
   
   
4. The capital markets provide additional capacity and flexibility for UK companies – in the five-year period analysed between 2014-2018, UK companies raised £750 billion in the bond, equity and leveraged loan markets. 
   
   
5. Covid-19 crisis capital cushion – the report finds that in response to the coronavirus crisis, corporate bonds and equity markets allocated significant capital flows to the corporate sector, raising £30 billion in under six weeks. 
   
   

Contingency planning: how capital markets have supported firms during Covid-19

UK corporates are engaged in a range of capital markets activities, from debt and equity financing to hedging through derivatives. Mark Lynagh, Co-Head of Debt Markets EMEA, observes that “UK corporates are active in using a portfolio of funding tools when they look at their balance sheet.”

Treasurers’ contingency liquidity planning had three initial strands during the crisis:

• Bank lending: bank lending lines were extended as corporates activated revolving credit facilities (RCFs)
• Government support: the UK government-funding scheme allowed many UK companies to access to liquidity
• Capital Markets: record issuance volumes since April, with corporates receiving substantial support from bond investors (buoyed by Central Bank support)
  
  

“A number of UK corporates have issued bonds in the last twelve weeks, as there has been a large rebound in underlining investors’ credit appetite, also bolstered by central bank liquidity,” suggested Lynagh.

In big picture terms, the longer-term evolution of UK capital markets has been a story of diversification and simplifying market access, adds Lynagh. “Corporates have enjoyed a wide range of private to public capital markets options, with a number of borrowers adopting credit ratings to further widen their funding options. This has helped to diversify the number of sectors issuing regularly in the capital markets.”