Greater demand for emergency funds in Europe

In resemblance to the darkest days of the 2020 coronavirus pandemic, businesses struggling with high inflation and rising operating costs are looking for new short-term financing loans.

The average conventional loan duration is five years, while European high-grade enterprises are taking out facilities with maturities of two years or less. They’ve closed short-term financing deals totalling €76 billion ($75 billion) this year, which is the second-highest amount on record behind the €153 billion extended in 2020.

As central banks struggle to contain soaring inflation, the rise in emergency funding is a concerning development. The US Federal Reserve is anticipated to stay hawkish when it announces its most recent monetary policy decision on Thursday, while the European Central Bank last week hiked its benchmark interest rate to the highest level in more than a decade.

According to Lucie Caresmel, head of EMEA corporate loan distribution at Credit Agricole Corporate & Investment Bank, deal flow is being driven by factors like increased commodity prices, margin calls, forecasts of more volatility, and pricing uncertainty. Businesses were borrowing, according to her, “to get their general corporate purposes core financing in order.”

Shorter-term funding gained popularity as the worldwide epidemic spread and most commercial activities were halted due to global lockdowns. Due to the uncertainty around when the economies will reopen, the loans allowed borrowers to strengthen their balance sheets.

Koninklijke Philips NV, a Dutch manufacturer of medical equipment with an investment-grade rating, just last week received a €1 billion loan with a 12-month duration “in light of recent developments and market volatility.” The actions taken, according to a firm representative “further strengthen our near-term liquidity position, as we expect a better cash flow from operating activities next year when we deliver on our strong equipment order book.”

The Swiss energy company Axpo Holding AG, Daimler Truck AG, and Enel SpA are more companies that have applied for temporary loans. Two-thirds of all borrowings come from businesses in the energy and utility sector, whereas earlier in the year after Russia’s invasion of Ukraine drove prices rising, commodity merchants scrambled to raise such cash.

Given the widespread uncertainty that has swept through international markets this year and at times prevented the capacity to initiate a bond deal, bond market volatility has also pushed some corporations toward taking out short-term loans to cover impending debt maturities.