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Europe’s debt stress is hitting corporate borrowing costs. Goldman flags who’s vulnerable - CNBC
Key Points
- Goldman Sachs says higher sovereign yields and heavy debt issuance are now driving up European corporate borrowing costs.
- Companies with weaker cash generation, near-term refinancing needs or significant floating-rate debt are the most vulnerable, analysts said.
- For investors, the shift underlines the need for increasing selectivity in fixed income and corporate credit positions.
Europe’s sovereign debt worries are starting to show up in corporate borrowing costs, potentially leaving some companies with less cash to invest or return to shareholders, according to Goldman Sachs.
Corporate borrowers in Europe are being squeezed from two directions — rising yields in government debt and surging U.S. hyperscalers’ bond issuance, which is increasing competition for capital.
Hyperscaler debt issuance is set to increase from $250 billion in 2026 to $420 billion in 2027, Goldman Sachs said in an Oct. 23 note, while global artificial intelligence project finance could double to $300 billion as tech giants increasingly turn to bond markets to fund the AI investment build-out.
That comes against a backdrop of rising borrowing costs globally. Yields on France’s 10-year government bonds, known as OATs, moved beyond 5% on Oct. 21 for the first time since 2002. The spread over Germany’s 10-year Bunds peaked at more than 177 basis points a day later, amid concerns about spillover risks elsewhere in Europe.
Developed economies including the U.S., the U.K. and Japan have also faced similar borrowing pressures this year.
Debt costs rise
With credit conditions tightening, Goldman analysts said higher interest costs are now starting to eat into company margins.
They noted that investment-grade yields in Europe have risen about 30 basis points to 4.4% since the start of September, with spreads to the sovereign risk-free rate widening by some 24 basis points to 117 basis points.
At the same time, high-yield borrowing costs have climbed around 90 basis points to 7%, with spreads widening by 94 basis points to 354 basis points.
Interest expense has increased from 1.25% to 1.85% of sales among Stoxx 600 companies since 2022 as refinancing costs have steadily risen, Goldman said. That 60 basis point increase has cut earnings by more than 5% over that period, according to the bank’s analysts.
The strain could intensify for companies with debt coming due or borrowing costs that reset with interest rates.
“The average maturity of Stoxx 600 debt is around seven years; one quarter must be refinanced within the next two years and a further quarter is floating-rate debt,” Goldman analysts said.
“Higher rates could therefore feed through to around half of the debt relatively quickly,” they noted.
Who is vulnerable?
That leaves companies with weak cash generation, limited pricing power, near-term refinancing needs or significant floating-rate debt particularly exposed, Goldman analysts said. “Rising yields increase their financing costs, while wider spreads compound the pressure on those facing near-term refinancing requirements.”
The pressure could force some management teams to prioritize their balance sheets over other uses of cash.
“Management teams are consequently becoming more focused on reducing leverage, potentially diverting capital away from investment or shareholder returns,” the analysts said.
