Debt is much more expensive than it was a year ago and, predictably, it will be much more so in a few months. Companies that are financed in the capital markets, either through the issuance of bonds or through syndicated loans (loans granted by several banks), in their various modalities, have seen the joy with which investors lent their money barely eleven months ago it has disappeared.
The change of cycle in monetary policy, which has brought the interest rates of the European Central Bank (ECB) from 0% to 2% since the summer – pending further increases – has completely changed access to business financing . Since January, the number of deals has plummeted – in high yield or high yield debt issues, 85%, and in syndicated loans, 75% – while the cost of debt has skyrocketed.
The Russian aggression against Ukraine, first, and the explosion of inflation, later, accelerated a process to which one more ingredient has been added: the imminent recession. It is true that there is a certain consensus that it will be a technical recession, not a severe one... as there was also that inflation would be transitory. We will see.
For now, the cocktail may be undrinkable for a few, especially with a view to 2023, since this year has been well saved due to fear of the consequences of the pandemic, war, inflation and rate hikes, plus the enormous amount of liquidity available to face the crisis, led companies to issue without restraint to cover their backs for what might happen.
Now, like when it starts to rain, there are fewer umbrellas and they are more expensive. "The explanation is very clear: with these interest rate rises, the economy is likely to go into recession and, for this reason, investors begin to ask for a higher premium," says Carlos Godina, CEO and head of structured finance. and capital markets of BNP Paribas in Spain and Portugal. It is the logical consequence of increasing the chances of default.
High-risk bonds started 2022 with a return of 2.8% and, after months of constant increases, exceeded 8% at the end of October. In investment grade, the number of syndicated loans to companies with a good or very good credit quality accumulates a fall of 32% until mid-November, which rises to 37% in bonds. And the required returns have also tripled.
Now, both segments of the market have slowed down their escalation a bit while awaiting new data on inflation and growth and, above all, until they see the tone of the ECB in its appointment on December 15. That day the rates will be raised again, the forecasts for 2023 will be updated and the new monetary policy roadmap will be announced both in terms of rates and the management of the ECB's balance sheet.
For the evolution of corporate debt in the markets, the question is, according to experts, how inflation is going to be managed, if the rise does not loosen up. But it seems clear that, whatever the outcome, everything will go through more expensive money and fewer emissions. Enrique Balboa, head of structured financing at BNP Paribas for Iberia, explains that "the notable drop in the volume of fixed-income issuance in 2022 is explained not only by the market volatility experienced, but also by the absence of significant debt maturities, as well as the availability of bank financing, especially in the first half of the year”.
In 2022, the banks have taken advantage of the opportunity that has been presented to them, but they are already raising prices. "We all have liquidity, what worries us is profitability," commented sources from an Ibex bank. "We are concerned about the impact of the increase in interest rates on companies, because it is true that there are a lot of savings in the system, but also that the combination of high inflation with the recession is a time bomb," the sources add. .
Delinquency is controlled, but until when? "It is not clear and it is normal for some default and declaration of insolvency to arrive, although in Spain calm reigns and we do not expect negative surprises," says Fernando García, general director of corporate debt and investment banking at Société Générale in Iberia. The previous turbulences have been overcome. 2023 awaits its hour...
