Why ING expects European corporates to borrow more and why it’s bullish

Investing.com -- European companies are likely to borrow more in the coming period, and ING Economics views that shift as a constructive signal rather than a warning sign, citing low leverage, strong balance sheets and subdued investment levels across the region, according to an ING analysis dated Friday.

ING said European corporate debt ratios have fallen sharply in recent years once adjusted for inflation-driven growth in the size of the economy. 

Since the Covid-19 period, nominal GDP in Europe has increased by about 30%, reducing the real value of outstanding debt. 

As a result, the consolidated non-financial corporate debt-to-GDP ratio has declined to just below 67%, a level last seen in 2007. 

ING contrasted this with the United States, where the comparable ratio earlier this year was similar to levels last recorded in 2015.

ING said the drop in leverage has not been driven by aggressive deleveraging but by weak borrowing. Corporate net lending has lagged GDP growth since peaking in 2020. 

Bank lending to corporates has only recently begun to recover, with outstanding loans rising 2.9% year-on-year in October.

That remains below nominal GDP growth of around 4% in the third quarter, indicating that overall debt accumulation is still modest.

While corporate bond issuance has reached record levels, ING said this does not signal excessive borrowing. European firms have increasingly shifted funding from bank loans to bonds, supported by pricing differences and past European Central Bank policies. 

Over the past 12 months, outstanding corporate bonds grew by about 3.5%, slightly above bank loan growth but still below GDP growth. 

ING said issuance has been boosted by refinancing needs from earlier peaks and higher price levels, rather than a broad expansion in leverage.

Private credit remains a small part of the European funding landscape. The International Monetary Fund estimates private credit accounted for 1.6% of corporate credit in Europe in 2023, compared with 7% in the United States. 

ECB and PitchBook data cited by ING show euro-area private credit funds held €106 billion in assets in the second quarter of 2024, about 1.5% of outstanding loans and bonds combined. ING said the limited scale reduces the risk of systemic stress.

Debt servicing pressures are also contained. According to BIS data referenced by ING, corporate debt service ratios in the eurozone remain below their average of the past two decades. 

ECB measures show interest burdens have risen from the unusually low levels of 2022 but are stabilizing as most bank loans have been repriced and borrowing costs have peaked.

ING highlighted high cash holdings as an additional buffer. European corporates hold cash equivalent to nearly 23% of total debt, compared with about 18% in the two decades before Covid. 

ING said these reserves mitigate refinancing risks and suggest headline debt ratios overstate underlying leverage by more than five percentage points.

The brokerage linked low borrowing to weak investment rather than excess risk-taking. Nominal corporate investment growth has lagged GDP growth since 2023, and investment-to-GDP ratios remain well below levels seen before the dotcom bust or the global financial crisis. 

ING said that, in this context, rising corporate borrowing would likely reflect a recovery in capital expenditure rather than financial stress, making higher debt levels a positive signal for Europe’s economic outlook.