Private credit in Europe surpasses pre-rate hike levels
European private lending activity rebounded to levels last seen in mid-2022, indicating a growing trend among investors to invest in high-risk corporate debt in anticipation of this year’s European Central Bank (ECB) interest rate cuts, according to recent data from Deloitte reported by Reuters on Tuesday.
Private debt funds, known for providing high-interest loans to indebted companies backed by buyout firms, issued 189 loans in the last quarter of 2023, remarking the highest since the second quarter of 2022, was recorded just prior to the initial interest rate hike by the ECB .
Deloitte’s Andrew Cruickshank said private debt deals are expected to keep rising in 2024, attributing this trend to credit markets opening up to riskier borrowers, despite the ECB maintaining high interest rates.
Cruickshank, who counsels European firms on private debt transactions, stated that current activity appears to be surpassing that of the last two quarters of the previous year.
According to Deloitte, the private markets have seen a revival, mirroring a resurgence in the bond market for high-risk companies, after experiencing a slump in the number of deals in Europe in the second quarter of 2023, the lowest since 2020.
European junk bond sales, issued by speculative-rated companies, increased by 51 per cent in January compared to the same month last year, according to S&P Global. Last year, debt investors were concerned about potential defaults due to stringent financing conditions.
However, the iTraxx Europe Crossover index, which gauges the cost of insuring against defaults in European junk bonds, is now at a two-year low of 302 basis points, a decrease from 406 points in September. The swift easing of credit conditions, anticipating ECB rate cuts, has caused unease among some central bank policymakers.
Isabel Schnabel, a member of the governing council, noted in a recent lecture that financial conditions have significantly eased due to anticipated rate cuts, necessitating more caution.
Concurrently, European firms are leveraging these favorable conditions to refinance loans at lower rates.
According to a Deloitte study, one-fifth of the private debt transactions in the last quarter of the previous year were refinancing deals.
Paul Watters, S&P’s senior director, confirmed this trend across debt markets, noting a significant amount of repricing and refinancing.
He mentioned that companies capitalising on this opportunity are concerned about potential shifts in market sentiment later in the year.
