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European private credit reverts to mid-2022 levels

A new study from Deloitte shows that European private lending activity has reverted to levels last seen in mid-2022 — a sign that investors anticipate European Central Bank interest rate cuts in 2024 as they take on risky corporate debt, according to a report by Reuters.

Deloitte’s study was published on Tuesday and reveals that private debt funds extended 189 loans in Q4 2023 — the most since Q2 2022, just before the ECB first raised interest rates.

The report cites Andrew Cruickshank, a Director at Deloitte who authored the study, as saying that private debt deal volumes would likely still rise this year after credit markets opened to riskier borrowers, even as the ECB keeps rates at record highs.

Cruickshank said: “From our own work in progress, activity seems to be higher than it was in the final two quarters of last year.”

Deloitte’s study also found that the number of deals in Europe slumped in Q2 2023 to the lowest since 2020. According to the report, this turnaround in private markets echoes a revival in the market for bonds issued by risky companies.

According to the report, data from ratings agency S&P Global reveals that sales of European junk bonds rose 51% in January from the same month last year. The iTraxx Europe Crossover index, which measures the cost of insuring against debt defaults in a basket of European junk bonds, is currently trading at around a two-year low of 302 bps, down from 406 bps last September.

The report also cites Isabel Schnabel, a Member of ECB’s executive board, at a university lecture in Milan last week, in saying that financial conditions had loosened substantially because markets were anticipating rate cuts, creating more need for caution.

Deloitte’s study also found that a fifth of European private debt transactions in Q4 2023 were refinancing deals instead of new loans — a trend that was widespread across debt markets, according to Paul Watters, a Senior Director at S&P.

Watters said: “We’ve seen an awful lot of repricing and refinancing.

“Companies that are taking advantage of this window (are) worried about market sentiment changing later in the year.”

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