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Tight loan pricing won’t last when rates start falling
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GlobalCapital, is part of the Delinian Group, DELINIAN (GLOBALCAPITAL) LIMITED,
4 Bouverie Street, London, EC4Y 8AX, Registered in England & Wales, Company
number 15236213
Copyright © DELINIAN (GLOBALCAPITAL) LIMITED and its affiliated companies 2024

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People and MarketsCommentLeader



TIGHT LOAN PRICING WON’T LAST WHEN RATES START FALLING

Ana Fati
March 22, 2024 12:39 AM
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LACK OF DEALS IS KEEPING MARGINS LOW, BUT VOLUME AND RISK WILL RETURN

Lenders have been living for most of the past two years in a paradise — for
borrowers. In the current syndicated loan market landscape, one word sums up the
whole scene: tight.

Higher interest rates are inherently bad for borrowers, and might be expected to
have led to wider margins.

In one respect, and in combination with the Covid pandemic and the
Russia-Ukraine war, they have. Banks are having to pay more for funding than a
few years ago, which means the cost of drawn debt for companies has gone up a
little.

But higher rates have also put companies off borrowing — for M&A, for example.
Meanwhile, banks are generally in good health, helped by fatter net interest
margins.

The result is that the slump in borrowing and simultaneous eagerness to lend
have tightened syndicated loan pricing right back to pre-Covid and pre-Ukraine
war levels, across the investment grade spectrum.

Loan bankers have little choice but to pay up and wait quietly for a surge in
M&A activity.

Recent RCFs have been priced at margins inside where they were last refinanced,
for borrowers such as Norsk Hydro, Axpo and Trafigura in recent weeks, to name a
few.

Banks are taking the path of least resistance and saying yes even to pricing
that seems too tight, to make sure they stay in the company’s syndicate and do
not miss out on future business.

The present arid plateau of loan pricing may seem endless, but it is unlikely to
last much longer. Two opposite forces could disrupt it.

Interest rates won’t remain on hold forever — and when they start to fall,
companies are likely to rediscover their appetite to borrow.

The worst rate increase cycle in the eurozone’s history is now past. This should
bring recovery and the summer will already mark a turning point. The current low
volumes in the loan market will of course keep pressure on pricing, but demand
will drive it wider again.

Less cheerful, but also potentially influential on loan pricing, is the rise of
corporate defaults.

According to S&P Global, in 2024 more companies have defaulted on debt than in
the equivalent period of any year since 2009.

Even though defaults are overwhelmingly on low grade credits, it would not take
much more of a rise in credit risk for banks to start playing hard to get, even
in the investment grade market.

Borrowers should enjoy the current favourable conditions while they last. Soon,
the scale will tilt in favour of banks and companies will find their faces
looking sterner.


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LeaderCartoonSyndicated LoansCommentInvestment Grade Loans
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Ana Fati
Syndicated Loans Reporter
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