Companies bringing a flurry of investment-grade deals to the European bond market in a post-summer sales rush are discovering how much more expensive raising new financing has become.
(Bloomberg) — Companies bringing a flurry of investment-grade deals to the European bond market in a post-summer sales rush are discovering how much more expensive raising new financing has become.
The average coupon for the 16 euro-denominated high-grade corporate bond sales, excluding financial firms, since the start of the month is 3.9%, according to data compiled by Bloomberg. That compares with the 1.3% average for the coupons of similar high-grade corporate debt coming due during 2023.
“From a credit standpoint, we are looking at the impact of higher rates when companies have to refinance,” Paul Watters, head of European corporate research at S&P Global Ratings, said in an interview. “This is a fundamentally different environment from what was seen after the financial crisis when borrowing costs were nailed to the floor.”
Funding costs have risen sharply for companies this year after central banks embarked on aggressive bouts of interest-rate hikes to bring surging inflation to heel. The risk now is that the cost of raising debt could slam the brakes on business activity and inflict more damage on Europe’s economies.
French analytical testing services firm Eurofins Scientific SE sold senior secured debt earlier this month with a 4.75% coupon, the highest for any of the batch of European investment grade bonds to come to market this month. That compares to coupons of 4% on similar debt sold in 2022 and 0.875% in 2021.
To be sure, higher interest rates can also help cushion the blow of rising funding costs, at least initially — with companies earning more interest on their cash balances than they are paying in additional coupons on their debt. That’s according to a JPMorgan Chase & Co. report by a team led by Matthew Bailey, executive director of European credit strategy at the bank.
Even so, firms need to prepare their financing needs well in advance as debt maturities mount sharply after 2024, said S&P’s Watters.
The amount of maturing high-grade European corporate debt denominated in euros jumps to about €193 billion ($206 billion) in 2025 and €200 billion in 2026 from €166 billion next year, according to data compiled by Bloomberg.
“It’s very important that companies start thinking about refinancing 18 or even 24 months before debt matures,” said Watters.
–With assistance from Ainhoa Goyeneche and Hannah Benjamin-Cook.
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