European credit resurgence: European private credit has surged back to mid-2022 levels, as indicated by recent data from Deloitte. This surge suggests that investors are increasingly drawn to risky corporate debt, anticipating potential interest rate cuts by the European Central Bank (ECB) in the coming year.

Deloitte's report highlights an uptick in private debt funds, which predominantly extend high-interest loans to indebted companies supported by buyout firms. In the final quarter of 2023, these funds issued 189 loans, the highest since mid-2022, just before the ECB began raising interest rates.

Debt activity rising

Andrew Cruickshank, a director at Deloitte and the report's author, predicts that private debt activity will continue to rise this year, driven by the opening up of credit markets to riskier borrowers, despite the ECB's maintenance of historically high rates.

This resurgence in private markets mirrors a broader revival in the issuance of bonds by companies with speculative-grade credit ratings. Sales of European junk bonds soared by 51% in January compared to the same period last year, according to data from S&P Global.

Relaxed credit conditions

In the past year, debt investors had been concerned about tight financing conditions potentially leading weaker companies to default on their borrowings. However, indicators like the iTraxx Europe Crossover index, which measures the cost of insuring against debt defaults in a basket of European junk bonds, have shown a significant decrease, indicating relaxed credit conditions.

The rapid easing of credit conditions ahead of potential ECB rate cuts has raised concerns amongst some policymakers. Isabel Schnabel, a member of the ECB's Governing Council, warned recently about substantial loosening in financial conditions due to market expectations of rate reductions.

Corporate refinancing trends

On the corporate side, European companies have been taking advantage of favourable conditions to refinance existing loans at lower rates. Refinancing deals accounted for a fifth of European private debt transactions in the final quarter of 2023, according to Deloitte's study.

Paul Watters, a senior director at S&P, highlights that this trend of repricing and refinancing is widespread across debt markets. Companies are keen to capitalise on this window of opportunity amidst concerns of changing market sentiment later in the year.

The resurgence in European private credit reflects a broader shift in investor sentiment towards riskier assets, driven by expectations of ECB policy adjustments.

(With Reuters Inputs)