FCF Interest & Corporate Loan Monitor Q4/2023 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 sec-tors 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)
• Interest rates continued to rise steadily in 2023, had already reached approx. 4.3% by October 2023, then fell again to approx. 3.4% in December and have risen significantly again since the beginning of the year to 4.0% by mid-February 2024 (increase of over 250bps in 24 months)
• The surge in interest rates continued to be strong in 2023, with an increase of around 35% (110bps) from January to October. As (core) inflation in the eurozone has stabilised some-what in the meantime, but is still too high, the ECB is unlikely to raise interest rates again in the short term, but is also unlikely to cut them. Companies are currently paying the highest interest rates on new loan agreements in over a decade

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 Q1/2024
  • 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
• Over the past twelve months, the cooperative banks in particular have increased their lending, while other banking groups have been more cautious. The credit banks’ lending volume decreased last year
• 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 does not warrant short-term interest rate cuts

• Inflation in Germany has since fallen again from its peak (over 11% as per October 2022) to currently 2.7% (provisional as per February 2024), but remains above the European Central Bank’s (ECB) 2% inflation target of 3.5%, which also applies to the core inflation rate adjusted for energy and food
• In the eurozone, which is more important for the ECB, inflation (provisional) as of February 2024 is 2.6% and the core inflation rate is 3.1%, with core inflation in particular also remaining well above the ECB’s 2% inflation target
• In 14 of the 20 countries of the eurozone, inflation is currently – well above in most cases – the ECB’s inflation target of 2%
• In the USA, inflation has now fallen from over 9% back to around 3.0% after the Fed announced interest rate hikes at the end of January 2022 and has already raised key interest rates eleven times in the meantime, by a total of 5.25% to 5.50%
• Since mid-2022, the ECB has raised the key interest rate significantly in 10 steps from 0% to 4.5% due to high inflation, which has also inevitably led to an increase in corporate lending rates. Inflation has now stabilised or fallen significantly. However, the ECB is not expected to cut interest rates in the short term (in the next 6 to 9 months) as it has announced that it will continue to monitor inflation for the time being with a view to second-round effects. The discontinuation of the ECB’s bond purchase programme in 2022 and the expected new debt levels of many EU countries also do not speak in favour of interest rate cuts in the short to medium term.