The latest trends and sentiment in debt funding

Thursday February 29, 2024

Simon Sherliker reviews the current state of the UK debt market

Optimism growing for the months ahead

The UK debt funding market is in a more buoyant place than it was twelve months ago, although the return of confidence is gradual.

A more settled business landscape in terms of interest rates and inflation has led to an improvement in management and investor confidence and a detectable wave of optimism throughout the market that we expect to build throughout the coming year.

2023 witnessed a significant year-on-year reduction in M&A transaction volume– and therefore a decrease in demand for funding to support strategic investments and acquisitions. However, steadily improving market conditions in 2024 mean many companies have started the year with a purposefully renewed positivity and reinvigorated focus on growth.

Seeking stability

While inflation and the accompanying, defensively high, interest rates have certainly had a profoundly negative impact on investor sentiment throughout 2023 (global M&A deal volumes fell 48% in Q1 2023 alone), the BoE base rate has remained at a raised, but stable rate of 5.25%, with this consistency and the associated expectations of reducing inflation offering a degree of relief the market has recently lacked.

This ‘relative’ stability is allowing businesses and funders to plan more effectively for the months ahead, with many already pricing anticipated base rate reductions into financing structures.

Rates expectations are a useful bellwether for macro-level investor sentiment, and they currently indicate that we can expect to see an increasing number of winning businesses begin to put funded growth strategies into action over the course of the year.

Looking ahead

Of course, many businesses will have one eye on the upcoming Spring Budget. Although, with the cost-of-living remaining stubbornly high relative to general wage growth and an election on the horizon, we anticipate that the Chancellor’s speech will be targeted at working people/voters as opposed to businesses.

From a corporate perspective, it would be encouraging to see the Government provide means to incentivise increased levels of business investment, such as through the increased availability of grants and allowances, particularly for those firms developing technology that will drive growth. Whether anything will be given away in this regard with an election to win remains to be seen, however it is unlikely that there will be any budgetary moves that materially reduce business confidence, which is some reassurance.

Despite early signs of economic recovery and general optimism, funder sentiment flitters between cautious and tentatively optimistic given the weight of trailing financial pressure and future electoral uncertainty, on both domestic and global scale.

Despite the slow return of confidence, scrutiny through this cautious lens is likely to pervade for the foreseeable future and so for those entities looking to attract debt funding, our recommendation hasn’t changed. It’s crucial to seek advice and get an adviser in early, similar to a sale process, as businesses need to be prepared to articulate their story alongside their credit strength, with lenders as focused as ever on downside protection.