European Corporate Borrowing Pain Set to Begin
(29 August 2023 – Europe) European corporate borrowers are bracing for repayment on trillions of debt sold when financing costs were at generational lows.
From 2024 onwards, corporate default rates and supressed investment are anticipated to become a growing feature of corporate, household and state budgets as growing levels of income is routed into financing debt. For most corporates, higher rates are more likely to lead to a drop in capital expenditure (capex), which drags on economic growth. Bank of England (BoE) analysts estimate that highly-leveraged companies account for almost two thirds of British corporate debt (60 percent) yet a mere five percent of the cash. This infers these enterprises are more likely to reduce investment or jobs in order to remain a going concern.
Companies in Europe, the Middle East and Africa bought back bonds at the fastest pace since 2009 in H1 2023 to slash leverage and reduce interest payments. Many have lengthened the maturity of their existing debt.
“During the vintage years of easy money there wasn't as much consideration given to what a high interest-rate environment might look like. We still see stress brewing ahead for some borrowers, especially those that have more aggressive capital structures” commented Oaktree Capital Management Portfolio Manager, Danielle Poli.
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