Large corporations increase borrowing in anticipation of rising interest rates

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Irish businesses more than doubled borrowing in December from a year earlier as businesses invested in reopening and rallied to secure funding ahead of an uncertain year for interest rates.

the end of non-financial corporations reached 2.8 billion euros for the month – by far the highest monthly total in 2021 and around 25% more than before the pandemic in December 2019, according to Bank data Central Ireland.

Most of the new borrowing – €2.6bn – consisted of loans of more than €1m, suggesting that large companies could lock in funding ahead of an expected increase in finance costs this year.

“Interest rate management needs to be back on the agenda,” said John Finn, managing director of Treasury Solutions, a Cork-based consultancy. “I would refinance soon, if I had a facility maturing within the next two years. If you get a peak [in borrowing] in January, it would be very interesting.

The rate environment has changed rapidly over the past month, with money markets reacting to interest rate tightening in the UK and hawkish guidance from the Federal Reserve and European Central Bank, all of which are fighting against the highest inflation in a generation.

Three-year swap rates, an indicator of the direction of borrowing rates in general, have risen 0.6pc since December, and bond investors are pricing in at least one euro zone rate hike this year.

Corporate borrowing, particularly by SMEs, has been subdued throughout the pandemic, continuing a trend of deleveraging dating back to the financial crisis, with companies repaying loans faster than they took out new credit.

While the total stock of business loans was stable in 2021 and at its lowest level in two decades, the December figure alone was very solid in the context of recent years.

“December is seasonally strong – but that’s probably also related to reopening and restocking,” said Diarmaid Sheridan, financial analyst at Davy.

“The data is very high level, so it is difficult to determine if there is something further behind at this stage.

The next strongest month of last year was June, when businesses borrowed 2.1 billion euros ahead of what was then supposed to be the gradual reopening of the economy.

Finn also said many companies may have come to the end of the deleveraging cycle and were at a point where more borrowing for investment again made strategic sense.

However, the smaller end of the SME sector remains reluctant to borrow, with just 129 million euros in loans below 250,000 euros in December, down 31% from the previous year.

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