By Peter Bergman (MoneyAmped.com)
According to recent data from Deloitte that was released on Tuesday, private lending in Europe has increased to levels that have yet to be seen since the middle of 2022. This indicates that investors are increasingly turning to high-risk corporate debt in anticipation of potential interest rate reductions by the European Central Bank. Specifically, this refers to debt that corporations issue.
The Number of Loans Granted to Companies Breaks All Records
Private debt funds extended 189 loans to financially troubled companies that buyout firms supported during the final quarter of 2023. This represented the highest number of loans extended since the second quarter of 2022, which was right before the European Central Bank (ECB) initiated the first interest rate hike.
Andrew Cruickshank, a director at Deloitte and the author of the study, stated that the volumes of private debt deals are likely to continue to increase this year. This is due to the fact that credit markets have become more accessible to borrowers with higher risk profiles. This is the case despite the European Central Bank (ECB) maintaining rates at historically high levels.
According to Cruickshank, a consultant for European companies that specialize in private debt transactions, “Based on our current projects, there appears to be a surge in activity compared to the last two quarters of the previous year,” he said.
A resurgence in the bond market for high-risk companies is mirrored by the shift in private markets, which was accompanied by a decrease in the volume of transactions in Europe during the second quarter of 2023 to the lowest point since 2020, as reported by Deloitte.
There Has Been a Significant Increase in Sales of High-Yield Bonds
European high-yield bonds, which companies issue with speculative credit ratings, experienced a 51% increase in sales in January compared to the previous year, according to data from S&P Global.
Last year, debt investors were preoccupied with concerns that stringent financing conditions could lead to struggling companies failing to meet their loan obligations.
Currently, the iTraxx Europe Crossover index, which assesses the expense of protecting against debt defaults in a collection of European high-yield bonds, is at a near two-year low of 302 basis points (bps), a decrease from 406 bps in September.
The swift relaxation of credit conditions prior to any action by the ECB to lower rates has caused concern among some of the central bank’s decision-makers.
In the course of a recent university lecture in Milan, Isabel Schnabel, who is a member of the governing council, she mentioned that the financial circumstances had significantly improved as a result of market expectations of rate reductions, which prompted a greater need for caution.
European businesses, on the other hand, have been taking advantage of the favorable conditions that are currently present in order to renegotiate their existing loans at more affordable rates.
According to the report by Deloitte, during the final quarter of the previous year, twenty percent of the private debt transactions that took place in Europe involved refinancing rather than entering into new loans.
This pattern was observed across the board in the debt markets, as stated by Paul Watters, a senior executive at S&P.
“We have witnessed a significant amount of repricing and refinancing,” according to him. Companies that are taking advantage of this opportunity have expressed concern about the possibility of a change in market sentiment in the months to come.
