Finance — Business

Euro corporate debt reduction now comes at a higher cost than before

Interest rates for European corporate loans are currently at an all-time high, with the gap between old and newly issued loans reaching 250 basis points.

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2025 September 16 . 12:30 AM

1 min read

Skyrocketing debt reduction costs hit European businesses hard

Euro corporate debt reduction now comes at a higher cost than before

In the final months of last year, the number of junk bonds trading at a level that implied they would not be fully repaid was limited to just two. However, this trend has changed in recent times, with more than a quarter of the around 750 junk bonds issued in euros currently trading in a similar fashion.

The increased risk associated with these bonds is reflected in the premium demanded for new bond issuance. At the beginning of the year, this premium was relatively low, but it has seen a significant increase. In September, the premium demanded was 12 basis points, three times the beginning-of-the-year rate.

Despite the higher risk, more than 96% of new bond tranches issued in September were rated investment grade. Interestingly, only 4% of these new issuances did not carry an investment-grade rating.

The strategists at ING Bank expect this trend to continue, predicting that defaults will rise to around 5.6% from the current level of less than 2%. Timothy Rahill and Jeroen van den Broek of ING also anticipate more weakness and volatility in the credit markets.

The market for bond refinancing is demanding more security and cost from companies, a trend driven by deteriorating fundamentals and the expectation of a further widening of spreads in the credit markets.

As for the investment-grade companies still able to obtain new loans despite the rising refinancing costs and turbulent market conditions, there is no publicly available list. However, it is known that European banks and pension funds are facing heightened volatility due to factors like France's budget crisis and Dutch pension reform.

This volatile environment is likely to persist, making it crucial for companies and investors to navigate the market with caution.