FCF Interest & Corporate Loan Monitor August 2022 published

FCF Fox Corporate Finance GmbH is pleased to publish the new “FCF Interest & Corporate Loan Monitor August 2022”.

FCF regularly conducts comprehensive research regarding the German corporate loan and interest market, based on publically available information. The results are updated and published quarterly in the FCF Interest & Corporate Loan Monitor

The FCF Interest and Corporate Loan Monitor provides valuable information regarding the prevailing macro-economic environment as well as the corporates loan and bank markets and covers the following topics:

  • macro-economic environment
  • currently prevailing interest rate environment
  • current developments of credit margins
  • behavior of the bank within the corporate loan market

The most important insights of the acurrent issue:

The interest rate-turnaround has now occurred – after four decades of declining interest rates
    • The average interest rates for corporate loans in Germany ("loan interest rates") across all sectors and rating classes had reached a peak of well over 10% in the early 1980s, which was followed by almost 40 years of declining interest rates (down to approx. 1%) until 2016
    • From 2016 to 2022, i.e. for a period of almost 6 years, interest rates have been fluctuating around the historic low of approx. 1.0% to 1.5% and have hence bottomed-out in the long-term view
    • Since the beginning of 2022, an initially moderate but in the second quarter 2022 increasingly rapid rise in loan interest rates to 2.5%+ in June 2022 could be observed, driven by high inflation rates in Germany, the eurozone and the US, as well as windfall profits for the lending banks (e.g. higher credit margins)
    • In July 2022 the increase in interest rates decelerated, loan interest rates even slightly decreased to 2.0%
    • Recent interest rates hikes have been dramatic, with increases of more than 250% in Q2/2022. Despite the small temporary decrease in the last four weeks, a further increase in interest rates is expected due to the high inflation and additional indicated hikes in key interest rates. Companies already have to pay the highest interest rates for the last 8 years for new loan financing
Current financing environment is still positive
    • Historically – viewed over a 40-year period – interest rates are currently still at a very low level, albeit with an upward trend
    • Banks even expect further improving lending terms & conditions for Q3/2022
      • however, the development of lending terms & conditions during the last few quarters dropped short of the banks' positive expectations
      • Empirical observations and feedback by companies in the market show both increasing reference interest rates as well as credit margins; further terms & conditions (e.g. maturity, covenants, securities, etc.) appear to be stable to slightly stricter
    • During the past twelve months, especially the foreign banks (after a temporary reduction) and Sparkassen have once again expanded their lending volumes, while the other banking groups have already started to become more cautious; mortgage banks already decreased new lending
    • The banking market is currently still very receptive to new financing with comparatively beneficial terms & conditions – especially for companies with high credit ratings (e.g. Investment Grade). However, this window could close rather fast over the next few months, particularly for companies with lower ratings in the non-investment grade "BB"-range and below
Macroeconomic data point to further interest rate hike(s)
    • At over 8%, inflation in Germany is as high as it was in the early 1980s, and the core inflation rate (excluding energy and food) is currently at 3.2%, well above ECB's inflation target of 2%
    • In the eurozone the harmonized consumer price index is also at 8.6% and the core inflation rate is now at 3.7%, which is significantly higher than in Germany and also well above ECB's inflation target of 2%
    • In all 19 countries of the eurozone, inflation is currently well above ECB's inflation target of 2%
    • In the US, inflation has now risen to over 9%, the FED announced interest rate hikes at the end of January 2022 and has meanwhile already raised the key interest rate four times by a total of 2.25%
    • Despite the key interest rate hike of 0.5% in July 2022, the ECB will not be able to avoid further interest rate hikes in the short term. The bond purchase program has already been reduced and additional key interest rate hikes have been implicitly announced. The expected new indebtedness of Germany (and other EU countries) in connection with the Corona and Ukraine crises indicate additional short to medium-term interest rate increases

To access the full report, please click here.

By Kai Frömert and Marco Buonafede Bennardo.