KPMG Debt Market Snapshot Edition Q3 2022

The KPMG Debt Market Snapshot Edition Q3 2022 is here. With the aim of keeping you up to date on the latest developments and trends in Europe's financing markets, our Debt Advisory experts use current market data to discuss prominent market drivers and provide first-hand insights from daily practice. Read more in our most recent release.

Overview: Europe is facing geopolitical and economic difficulties and uncertainty. Just two years after the pandemic, European governments are being forced back into damage limitation mode. Energy costs have skyrocketed and fuel inflation, putting a strain on many companies' financials. Although employment is at an all-time high and monetary policy remains accommodating for the time being, a slowdown of the European economy is imminent.

In view of the economic situation and persistently above-target inflation, the ECB has brought forward interest rate hikes. Following a 50bps benchmark rate increase in July, the ECB further raised its rates by 75bps in September. In general financing conditions have tightened significantly, reflecting the surge in benchmark rates and spreads. Many companies took advantage of cheap liquidity to extend debt maturities in recent years, meaning that refinancing is not an immediate worry for most. While financing costs are rising for all companies, the more vulnerable face the additional hurdle of not having guaranteed access to the financing market. Without a clear catalyst in the near future for a significant reopening of primary markets for speculative grade issuers, market access will remain problematic.

•  With the bond market characterised by surging yields and elevated volatility, companies continued to tap the Schuldschein market to benefit from spread arbitrage and lower execution risk. Despite the traditional summer break in August, volume reached €6.6bn in Q3 2022, resulting in a record issuance of €24.0bn for the first nine months of 2022. Thus, full-year volume is set to surpass the €30.0bn threshold for the first time
• The High-Yield bond market recorded the lowest quarterly volume since the eurozone debt crisis in 2011. With a lack of pricing references and liquidity in primary, issuers tended to shift to the loan or direct lending sphere to take advantage of the comparatively cheaper funding costs and lower execution risk. Currently only a few names can tap the HY market and the segment is expected to see very low activity in the coming months
• The Sponsored Loans market saw a volume of €9.0bn in 18 deals in Q3, mainly attributable to M&A activity. While figures are up 50% QoQ, activity is nowhere near last year's figures. The TLB spread increased by 65bps to 513bps while yields climbed to 7.4% given the substantial OIDs, often in low 90 or high 80 area. With fewer deals in the pipeline and high execution risk, activity is not expected to pick up