FCF Interest & Corporate Loan Monitor Q4/2022 published

FCF Fox Corporate Finance GmbH is pleased to publish the new “FCF Interest & Corporate Loan Monitor Q4/2022”.

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 current issue:

The interest rate-turnaround is still in full force and effect – 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 4.0% in Oct. 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)
  • As of November 2022, the rise in interest rates has slowed somewhat, with lending rates even falling slightly to around 3.8%. Currently, interest rates increased slightly again and are at around 4.0% as of February 2023
  • Recent interest rates hikes have been dramatic, with increases of more than 60% (150bps) within the quarters Q3-Q4/2022. Despite the temporary stabilization, a further increase in interest rates is expected – due to the continuing high inflation and additional indicated hikes in key interest rates. Companies already have to pay the highest interest rates for the last eight years for new loan financings

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 an upward trend
  • Banks expect improving lending terms & conditions for Q1/2023
    • however, the development of lending terms & conditions during the last few quarters 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
  • 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 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 8.9%, but like the core inflation rate adjusted for energy and food (4.8%), it remains well above the 2% inflation target of the European Central Bank (ECB)
  • In the eurozone the harmonized consumer price index has reached 8.5%, with core inflation rate now also at 4.7% – both significantly above the ECB 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 meanwhile fallen from over 9% to below 6.5% again, after the FED announced interest rate hikes at the end of January 2022 and in the meantime has already raised the key interest rates eight times by a total of 4.50% to 4.75%
  • Despite its 5th interest rate hike by 0.50% to now 3.0%, ECB will further increase the key interest rates. The bond purchase program has already been terminated to a large extent and additional key interest rate hikes have been implicitly announced. The expected additional 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 increases

To access the full report, please click here.

By Kai Frömert and Marco Buonafede Bennardo.