FCF Interest & Corporate Loan Monitor Q3/2023 published

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 sectors and rating classes have 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 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 continuously again and are at around 4.2% as of mid-November 2023 (increase of 95bps within 11 months

§  In 2023, interest rates continued to rise sharply, with increases exceeding 30% (95 basis points) in quarters Q1-Q3/2023. Although core inflation in the Eurozone has somewhat stabilized, it remains high, leading to expectations that the ECB will not implement further rate hikes or cuts in the short term. Consequently, businesses are facing the highest interest rates for new credit financing in about twelve years

Current financing environment currently 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 anticipate improved 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 reference interest rates as well as credit margins; further terms & conditions (e.g. maturity, covenants, 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 lending volumes, while the other banking groups have already started to become somewhat more cautious

§  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 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 does not permit reductions in interest rates in the near term

§  Inflation in Germany has since fallen back from its peak (above 11% in October 2022) to its current level of 3.0% (per end of October 2023), but like the core inflation rate adjusted for energy and food (4.3%), 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 stands at 2.9% (end of October), with core inflation rate now at 4.2%. Notably, the core inflation remains significantly above the ECB’s inflation target of 2%

§  In 16 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 3.5% again, after the FED announced interest rate hikes at the end of January 2022 and in the meantime has already raised interest rates eleven times by a total of 5.25% to 5.50%

In mid-September 2023, the ECB raised the key interest rate by another 0.25% to 4.50%. Given the currently stabilizing inflation, we do not expect further rate hikes in the short term. However, the ECB will closely monitor inflation developments, particularly energy prices, through the winter of 2023/2024. Due to the still excessively high core inflation, short-term interest rate cuts are also unlikely. Additionally, the ECB’s cessation of its bond-buying program in 2022 and the anticipated new debt by many EU states suggest that short- to medium-term rate cuts are not forthcoming.