Signs of a credit crisis are going global as companies struggle to raise financing.
The banking crisis that swept through global markets earlier this year was at an end, Federal Reserve Chairman Jerome Powell declared in May. And indeed, the ripples from the collapses of Silicon Valley Bank, Signature Bank, and First Republic Bank appear to have settled out. But for many companies trying to raise financing, their own crisis with banks may have just begun.
For many reasons—high interest rates, tighter lending conditions, slowing growth—companies in the US, Europe, and Asia are struggling to secure capital for new investments or to roll over existing debt.
“Our impression is that it is getting more difficult for companies globally to get financing,” says Jamie Thompson, head of macro scenarios at Oxford Economics in London. “We’re expecting tightening credit conditions for businesses to continue and for that to weigh on demand. At the same time, we don’t see the peak impact from US interest-rate raises until next year, so we are really at the start of the problem.”
Multiple surveys, in the US and beyond, are telling much the same story. When Oxford Economics surveyed businesses globally about their perceptions of forthcoming risks, executives responded that “banking system strains and tightened credit supply” now pose the greatest threats to the global economy.
The Federal Reserve’s April Loan Officer’s Opinion Survey on Bank Lending Practices provided a clear indication of how difficult it has become to get financing.
“Over the first quarter, significant net shares of banks reported having tightened standards on [commercial and industrial] loans to firms of all sizes,” the Fed report said. “Tightening was most widely reported for premiums charged on riskier loans, spreads of loan rates over the cost of funds, and costs of credit lines. In addition, significant net shares of banks reported having tightened the maximum size of credit lines, loan covenants, and collateralization requirements to firms of all sizes.”
Goldman Sachs regularly surveys US small businesses to assess their financial position. In the latest Goldman survey, 17% of small businesses reported having applied for a new loan in the last three months, but two-thirds of these “found it difficult to access affordable capital.”
The American Bankers Association found much the same thing. The ABA publishes a quarterly report on credit conditions in the US Members of the association’s economic advisory committee, in their latest report, “expect business credit availability will deteriorate in the next six months, and most expect business credit quality to deteriorate.”
US firms that rely on issuance of high-yield bonds to finance investment are feeling the squeeze especially keenly. The size of the so-called junk bond market has fallen 11% overall since its peak in 2021, as interest rates have soared from around 4% to nearly 9%. This, along with high interest rates and a slowing economy, have pushed up defaults in the US junk bond market dramatically: to $21 billion in the first five months of 2023, according to data firm PitchBook, more than the total in 2021 and 2022 combined.
Some companies are taking the cue to deleverage. Carnival Cruise Lines, which boasts a market capitalization of $19.7 billion, decided against rolling over existing debt on account of the sky-high rates on bonds. Instead, it used cash on its balance sheet to pay down the debt.
“We believe we are well positioned to pay down near-term debt maturities from excess liquidity and have no intention to issue equity,” CEO Josh Weinstein told analysts on a March earnings conference call.
M&A activity also has slowed to a halt because private equity firms can’t arrange the financing for leveraged buyouts.
“The expense and high interest rates make the economics of leveraged buyouts really difficult,” says Lyuba Petrova, managing director for leveraged finance at credit rating agency Fitch. “In good times, the average weekly volume for leveraged loan issuance is between $15 billion and $17 billion; for the past couple of weeks, it was maybe $3 billion.”
Tough All Over
One key difference between the US and Europe is that US-based companies tend to raise money through the capital markets while European companies predominantly borrow from banks. But European companies are feeling the same pressures as their American counterparts.
The European Central Bank said in its May 2023 bank lending survey that credit standards for loans had “tightened further substantially” to the highest level since the 2011 financial crisis. At the same time, the ECB said demand for loans fell by 38% and rejected loan applications made up nearly 18% of the total, the highest level since 2015.
“European companies are just not doing big investments,” says Jeroen Van Doorsselaere, vice president of global product and platform management at Wolters Kluwer FRR, a business advisory firm. “Bank rates are so high; many firms worry they won’t be able to pay a loan back. Funding is not available unless your firm has absolutely the very best credit ratings.” Most vulnerable to default are companies in Italy and Spain, which have the highest share of short-term and variable interest rate debt, according to the Banque de France.
The slowdown has been sudden and severe. “Growth in total net bank lending to eurozone households and businesses slowed in the first quarter of 2023 to the weakest it’s been since the third quarter of 2021, Martin Beck, chief economic adviser to EY’s quarterly European Bank Lending Economic Forecast, said in an email, “meaning that when adjusted for inflation, lending growth was in negative territory.”
For the minority of European firms that rely on bonds to raise capital, the high-yield bond market has suffered the same kind of shrinkage as its US counterpart, falling 15% since its peak, according to Bloomberg News. High-yield interest rates are over 7%, compared with 5% at the same point last year. According to Fitch, high yield issuance has plunged in Europe, down 58% from the previous year.
There are no overall numbers for bank loans in Asia, which covers a more balkanized group of markets. China is an outlier, having cut its policy interest rate from 2.75% to 2.65% in hopes of stimulating its struggling economy.
But the World Bank said in its June report on Global Economic Prospects that a run-up in debt by Asian governments and businesses could weigh on growth this year. “Elevated debt loads make debt distress more likely, particularly in the face of adverse shocks that lead to increased risk aversion and borrowing costs, and ultimately slower growth,” the report said. And because Asian businesses are heavily dependent on exports to the US and Europe, Thompson notes, the tighter lending conditions in those regions will likely impact Asian suppliers through reduced orders due to lack of available financing.
“When we get that sort of weakness in advanced economies, that spills over to emerging economies,” he warned. “We are forecasting a period of subpar growth as the most likely outcome, rather than anything really dramatic.”