FCF Interest & Corporate Loan Monitor Q4/2024 published

The interest rate turnaround after four decades of declining interest rates

1. Declining interest rates over 40 years: Average interest rates for corporate loans in Germany (“loan interest rates”) across all sectors and rating classes peaked at well over 10% in the early 1980s, followed by almost 40 years of declining interest rates (down to approx. 1%) until 2016
2. Period of low interest rates: In the 6 years from 2016 to 2022, lending rates fluctuated around the historic lows of between 1.0% and 1.5%

• Interest rate turnaround: Since the beginning of 2022, there has been an increasingly rapid rise in loan interest rates to up to 4.3% in Oct. 2023, mainly driven by high inflation rates in Germany, the eurozone and the US, coupled with higher credit margins at the lending banks (higher risk premiums). Since then, interest rates fell slightly until Q4 2024, to 3.4% in Dec. 2024, before rising again recently and currently standing at around 4.0% as at Feb. 2025 according to forecast
  • Loan interest rates rose by approx. 2.60% in the last 36 months from Feb. 2022 to Feb. 2025
  • Trend reversal and current interest rate outlook: Since June 2024, the ECB has reduced the base rate in five steps by a total of 160bps to currently 2.90% (after 10 consecutive increases). Despite a slight stabilization of (core) inflation in the eurozone, it remains at a too high level, meaning that no further major interest rate hikes are expected in 2025. Irrespective of this, companies are currently paying higher interest rates on new loan financing than they have for over a decade

Current financing environment currently still positive

• Historically – viewed over a 40-year period – interest rates are still at a relatively low level, even though the economy has not had to cope with such a dramatic rise in interest rates in such a short period of time in the recent past
• Banks anticipate improved lending conditions for the current quarter Q1/2025
  • However, the development of actual lending conditions in the last few quarters has regularly fallen short of the banks’ positive expectations
  • Empirical observations and feedback from companies in the market show continuing increases in credit margins, with reference interest rates remaining constant or declining slightly. Other credit conditions (e.g. maturities, covenants, collateral, etc.) are increasingly strict compared to previous quarters, in our view
• In the past twelve months, cooperative banks in particular have expanded their lending, while other banking groups have been more cautious. The credit banks’ lending volume even decreased slightly last year
• The banking market is currently still receptive to new financing with comparatively good conditions – especially for companies with strong and medium credit ratings (i.e. investment grade and higher sub-investment grade (so-called cross-over)). For companies with lower credit ratings (BB- and below) and / or in sectors currently considered “difficult” (e.g. automotive, mechanical engineering, construction), however, finding new lenders is already more challenging at present

Macroeconomic data does not support major interest rate cuts in the short term

• • Inflation in Germany has declined from its peak (over 11% as per October 2022) to currently 2.8% (provisional as per January 2025), but is still well above the 2% inflation target of the European Central Bank (ECB), as is the core inflation rate adjusted for energy and food at 3.6%
  • In the eurozone, which is more important for the ECB, inflation (provisional) as per January 2025 is 2.5% and the core inflation rate is 2.7%. Core inflation in particular thus also remains well above the ECB’s 2% inflation target
  • In a total of 12 out of 20 eurozone countries, inflation is currently still – in some cases significantly – above the ECB’s 2% target
  • In the USA, inflation has fallen from over 9% back to around 2.9%, while the FED has lowered key interest rates in three steps from 5.50% to 4.50% since September 2024
  • Since mid-2022, the ECB has raised the key interest rate significantly in 10 steps from 0% to 4.5% due to high inflation, and lowered it again in 5 steps to the current 2.90% since June 2024. The increase has inevitably led to a rise in corporate lending rates. Although (core) inflation has now stabilized or fallen significantly, it remains at too high a level. Unless inflation rises again or remains at the current level, there could be a maximum of 1-2 smaller interest rate cuts in 2025. Further major interest rate cuts are unlikely in 2025 in our view