Caution needed as European private credit rebounds, says Deloitte

London — European private lending activity has rebounded to levels last seen in mid-2022, new data from Deloitte showed on February 27 2024, in a sign investors are piling in to risky corporate debt as they anticipate European Central Bank (ECB) interest rate cuts in 2024.

Private debt funds, which mostly lend at high interest rates to indebted companies backed by buyout houses, extended 189 loans in the final quarter of 2023, the accounting group said, the most since the second quarter of 2022, just before the ECB first raised interest rates.

Andrew Cruickshank, a Deloitte director and the study’s author, said private debt deal volumes were likely still rising in 2024 after credit markets opened up to riskier borrowers, even as the ECB keeps rates at record highs.

“From our own work in progress, activity seems to be higher than it was in the final two quarters of last year,” said Cruickshank, who advises European companies on private debt deals.

The turnaround in private markets, where the number of deals in Europe slumped in the second quarter of 2023 to the lowest since 2020 according to Deloitte, has echoed a revival in the market for bonds issued by risky companies.

Sales of European junk bonds — issued by companies whose debt is rated as speculative — rose 51% in January 2024 from the same month in 2023, data from ratings agency S&P Global showed.

Debt investors spent much of 2023 worrying that tight financing conditions would cause weaker companies to default on borrowings.

Now, the iTraxx Europe Crossover index, which measures the cost of insuring against debt defaults in a basket of European junk bonds, is trading at about a two-year low of 302 basis points (bps), down from 406 bps in September 2023.

The rapid loosening of credit conditions ahead of any move by the ECB to cut rates has unsettled some of the central bank’s policymakers.

Governing council member Isabel Schnabel said at a university lecture in Milan on February 23 that financial conditions had loosened substantially because markets were anticipating rate cuts, creating more need for caution. European companies, meanwhile, have been benefiting from current accommodative conditions to refinance existing loans at cheaper rates.

A fifth of European private debt transactions in the final quarter of 2023 were refinancing deals instead of new loans, the Deloitte study showed.

Paul Watters, senior director at S&P Global Ratings, said this trend was widespread across debt markets.

“We’ve seen an awful lot of repricing and refinancing,” he said. “Companies that are taking advantage of this window (are) worried about market sentiment changing later in the year.”

Reuters