FCF Interest & Corporate Loan Monitor Q1/2024

Interest rate turnaround after four decades of declining interest rates 

• After 40 years of declining and another 8 years of historically low interest rates, the interest rate turnaround now seems to be sustainable.
• ECB has increased the key interest rates in 2022 and 2023 extremely quickly in 10 steps from 0% to 4,5%.
• The recent interest rate decline of 6 June by 0,25 percentage points to 4,45% has been anticipated by the interest and loan markets and, hence, been already priced in, a larger positive effect on the interest rate environment has not occurred. 
• Even in case inflation in the Euro zone would reach the ECB i9nflation threshold of 2% during the next months, a new low or zero interest rate phase is not to be expected.
• ECB can be assumed to continue lowering interest rates rather slowly and carefully, amongst others to reduce pressure on the highly indebted Euro-zone countries as well as the European economy.
• Inflation and interest rate will level off in the positive area, i.e., money will continue to cost a price. 

Increasing number of Insolvencies in Germany  

• The number of corporate insolvencies in Germany has started to climb dramatically by over 60% during the last 6 months.
• Reasons are, inter alia, the ongoing recession, geopolitical uncertainties, the continuously high inflation as well as the rapidly increased and sustainably high financing costs (Euribor + bank margins). 

Banks will become more cautious when lending money 

• Based on historic experience, increasing insolvency ratios lead to a significantly increasing number of non-performing and defaulting loans; usually, the number of non-performing loans exceeds to numbers of insolvencies by far and will lead to rising stress level within the intensive care departments of the financing banks. 
• With rising numbers of non-performing and defaulting loans, banks tend to become more cautious and reluctant towards issuing new loans or prolonging existing financing – even to the effect of a credit crunch. 
• In addition, banks will significantly increase their risk margins for the loans which they are still willing to provide to cover losses of the non-performing loans. 
• At the moment, the bank market for loans is still very much open, even with comparably positive terms and conditions for investment grade companies; however, this window might rapidly close during the next months, especially for non-investment grade borrowers with rating in the “BB”-area and below.