The impact of rate increases on businesses is expected to intensify in 2024. Businesses haven’t been impacted much by higher rates so far because they have used the cash they collected during Covid and refinance needs have been limited. However, refinancing needs will rise in 2024 Small and medium sized companies and lower rated HY issuers will be most impacted. The spillover from higher rates will be more limited for IG companies.
Corporate fundamentals are deteriorating, but from healthy levels.
In the United States, as in Europe, companies emerged from the Covid crisis with solid fundamentals (high margins, high interest coverage rates, record levels of cash etc.). Companies benefitted from the low cost of debt, as a result of years of historically low interest rates. Indeed, businesses have not been too affected by the rate hike so far. Corporate fundamentals are now deteriorating, but from healthy levels (see chart).
Following two years of quite low supply, the gross issuance of non-financial corporate bonds is finally likely to increase in 2024, mostly driven by refunding needs. With less need for capex, dividends or M&A, net issuance should not record meaningful growth for both IG and HY.
No immediate wall of maturities is foreseen in credit markets in 2024, especially in high-beta segments, like US and EUR high yields. In Europe, while net issuance of non-financial IG is likely to remain modest, as in recent years, financials will probably confirm their leading role in 2024. However, as most of the targeted longer-term refinancing operations have already been repaid and a weaker growth outlook means lower lending activity needing to be refinanced, the extent to which financials’ net supply could surprise to the upside appears lower than in 2023 and 2022.
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