By Caroline Hyde and Esteban Duarte Dec. 15 (Bloomberg) -- Abertis Infraestruturas SA, Spain’s largest highway operator, has 20 years of revenue growth and an “excellent” risk profile from Standard & Poor’s. Yet of the last 10 financing proposals it received from banks, none was for a loan. “I’ve never in more than 15 years in business seen banks so unwilling to lend,” said Jose Aljaro, chief financial officer at Barcelona-based Abertis. The company turned to the bond market, selling 1 billion euros ($1.5 billion) of seven- year notes in September. For all the cash provided by the European Central Bank to ease the worst seizure in credit markets since World War II, financial institutions in the region are unwilling to lend, using the money instead to invest in the safest, most liquid government securities. Bond investors are offering money like never before as returns on corporate debt reach as much as 70 percent this year, according to Merrill Lynch & Co. indexes. The result is corporate bond sales in Europe are exceeding the amount raised through bank loans for the first time, with issuance by non-financial companies doubling to a record 337 billion euros this year. Syndicated loans, or debt underwritten by a group of banks which they then sell to investors, fell 46 percent to 279 billion euros, data compiled by Bloomberg show. European banks, which have lost or written down $561 billion in the credit freeze, are awash with cash after governments approved $5.3 trillion of aid, more than the annual gross domestic product of Germany, European Union data show. Government Bonds “The global banking system is going through a government- mandated deleveraging of its balance sheet, so lending to corporates has been severely reduced,” said Louis Gargour, the chief investment officer at hedge fund LNG Capital LLP in London. Financial institutions increased their holdings of government debt to 1.51 trillion euros in October, from 1.19 trillion euros at the end of 2007, ECB data show. The situation is similar in the U.S., where bank investment in such securities has risen by 25 percent to $1.39 trillion since 2007, according to the Federal Reserve. Banks are also cutting back on other types of corporate loans. In Europe, a net 8 percent of lenders reported a tightening of credit in the third quarter, compared with 21 percent in the previous three-month period, the ECB said in its Euro-Area Bank Lending Survey on Oct. 28. Commercial and industrial lending fell 18 percent in the U.S. to $1.35 trillion as of Dec. 2 from a record high a year ago, Fed data show. ‘Shut Their Doors’ KSB AG, the Frankenthal, Germany-based pump maker, bypassed banks when it sought debt financing in October on concern that lenders “will shut their doors on us when we do need the money,” said Heiko Boes, the company’s head of finance. KSB raised 100 million euros of so-called Schuldschein debt, a type of promissory note issued privately under German law, Bloomberg data show. The company increased the sale by 33 percent after investors offered the borrower more money than it initially sought. A.P. Moller-Maersk A/S, the largest container shipping line, sold 750 million euros of five-year notes in October in its first bond offering, Bloomberg data show. It chose to sell notes rather than raise loans to diversify its funding and because of a surge in demand for fixed-income securities, said Jan Kjaervik, the Copenhagen-based company’s head of group finance and risk management. “The European bond market looks like it’s becoming a larger and more important source of funding,” Kjaervik said. First-Time Issuers First-time bond issuers sold at least 21 billion euros of debentures this year, four times more than in 2008, Societe Generale SA data show. While the bank-debt market has diminished there’s still demand, according to BNP Paribas SA, the top arranger of syndicated loans in Europe this year as measured by Bloomberg data. “You will find during times of uncertainty, such as the early 1980s, the Russian crisis or Sept. 11, the bond market becomes very ineffective because investors can disappear overnight,” said Julian van Kan, the global head of loan syndications and trading at BNP in London. While banks retrench, bond investors can’t lend enough to companies as the economy emerges from recession. High-yield, high-risk corporate bonds have returned 72 percent this year, including reinvested interest, after losing 33 percent in 2008, according to Merrill Lynch. Companies sold a record 25 billion euros of the debt since June, Bloomberg data show. High-yield, or junk, debt is rated below Baa3 by Moody’s Investors Service and BBB- by S&P. Lower Benchmarks A plunge in benchmark government bond yields and swap rates, which are the cost to companies of exchanging fixed interest payments for floating ones, have allowed borrowers to cut an average 3 percentage points off the yield they offer investors to buy their debt, according to Merrill Lynch data. Yields on German five-year government bonds dropped to 2.24 percent, below the past decade’s average of 3.71 percent, while the five-year euro interest-rate swap fell to 2.65 percent, about a four-year low, Bloomberg data show. “The European funding landscape has changed permanently,” said Robin Stoole, head of bond syndicate at Lloyds TSB Corporate Markets in London. “The bond market has never been so important,” particularly “as bank-market liquidity looks set to remain constrained,” he said. Ratio Reversed The resulting surge in bond sales means Europe’s debt market is becoming more like the U.S.’s, where note issues account for about 80 percent of transactions. Until this year, the ratio was reversed in Europe, Bloomberg data show. Spain’s Abertis, which traditionally raised half its money in the syndicated loan market, has 65 percent of its debt in bonds after the September issue. “The syndicated loan has almost disappeared as a product,” said Aljaro. “Bank funding is now restricted to bilateral, bridge loans or club deals.” Companies with non-investment grade ratings may have difficulty getting loans because of new bank capital rules. Under the Basel II regulations, banks are encouraged to lend to higher-quality borrowers because of the increased capital charge they face when lending to less creditworthy companies, according to Edward Eyerman, head of European leveraged finance at Fitch Ratings in London. Bank Capital Concern that regulations will crimp lending further was among the reasons Holcim Ltd., the second-biggest cement maker, opted for bonds instead of loans, Christof Hassig, head of corporate financing and treasury, said at the Euromoney Corporate Finance Conference in Paris last week. Jona, Switzerland-based Holcim has 66 percent of its debt in bonds, up from 40 percent at the end of last year, he said. The company is rated Baa2 by Moody’s, and BBB by S&P. “It’s more difficult for companies to refinance existing debt and to obtain new loans from the banks,” said Daniel Pedersen, senior money manager at PFA Pension in Copenhagen, which oversees $40 billion. “Small- and medium-sized companies are more vulnerable because they find it more difficult to replace bank loans with bonds from the capital markets.” Enel SpA, Italy’s biggest utility, sold more than $14 billion of bonds this year in euros, pounds and dollars, according to data compiled by Bloomberg. “If we were going to do another big loan like the 35 billion we did in 2007, it would not be achievable in this market,” Alessandro Canta, the Rome-based company’s head of group finance, said at the Paris conference. To contact the reporters on this story: Caroline Hyde in London chyde3@bloomberg.net; Esteban Duarte in Madrid at eduarterubia@bloomberg.net

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