FCF Interest & Corporate Loan Monitor Q2/2023 published

FCF Fox Corporate Finance GmbH is pleased to publish the new “FCF Interest & Corporate Loan Monitor Q2/2023”.

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 current issue:

The interest rate-turnaround after four decades of declining interest rates
    • The average interest rates for corporate loans in Germany ("loan interest rates") across all sec-tors and rating classes have reached a peak of well over 10% in the early 1980s, which was fol-lowed by almost 40 years of declining interest rates (down to approx. 1%) until 2016
    • From 2016 to 2022, i.e. for a period of more than 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 increase in loan interest rates up to 3.4% in Nov. 2022 could be observed, driven by high inflation rates in Germany, the eurozone and the US, as well as significantly higher credit margins of the lending banks (compensating the banks for possible higher default risks)
    • In December 2022, the rise in interest rates has slowed somewhat, with lending rates even falling slightly to around 3.2%. In 2023, interest rates increased significantly again and are at around 4.5% as of the end of August 2023 (increase of 150bps within 1 year)
    • Recent interest rates hikes have continued to be strong, with increases of more than 30% (100bps) within the quarters Q1-Q2/2023. Due to high inflation and additional indicated hikes in key interest rates, a further increase in interest rates is still expected. Companies already have to pay the highest interest rates for the last twelve years for new loan financings
Current financing environment still positive
    • Historically – viewed over a 40-year period – interest rates are currently still at a comparably low level, albeit with a clear upward trend
    • Banks expect unchanged lending terms & conditions for Q3/2023
      • however, the development of lending terms & conditions during the last few quarters regularly fell short of the banks' positive expectations
      • empirical observations and feedback by companies in the market show both increasing refer-ence interest rates as well as credit margins; further terms & conditions (e.g. maturity, cove-nants, securities, etc.) appear to be stable to slightly stricter in our view
    • During the past twelve months, especially the foreign banks have significantly expanded their lend-ing volumes, while the other banking groups have already started to become somewhat more cau-tious
    • 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. In-vestment Grade and good sub-investment grade). However, this window could close rather rapidly 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)
    • Inflation in Germany has since fallen back from its peak (above 11% in October 2022) to its current level of 6.8% (per end of June 2023), but like the core inflation rate adjusted for energy and food (6.1%), it remains well above the 2% inflation target of the European Central Bank (ECB)
    • In the eurozone, decisive for the ECB, the harmonized consumer price index has reached 5.5% (end of June), with core inflation rate now also at 5.4% – both significantly above the ECB inflation target of 2%
    • In 19 of the 20 countries of the eurozone, inflation is currently – well above in most cases – the ECB's inflation target of 2%
    • In the US, inflation has meanwhile fallen from over 9% to around 4.0% again, after the FED an-nounced interest rate hikes at the end of January 2022 and in the meantime has already raised in-terest rates eleven times by a total of 5.25% to 5.50%
    • Despite its 9th interest rate hike by 0.25% at the end of June to now 4.25%, the ECB will fur-ther increase interest rates in our view. The bond purchase program has already been termi-nated and additional interest rate hikes have been implicitly announced. The expected addi-tional indebtedness of Germany as well as other EU countries in connection with the COVID19 and the Ukraine crises indicate additional short to medium-term interest rate in-creases

To access the full report, please click here.

By Kai Frömert, Marco Buonafede Bennardo and Valentin Plettner.