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Interest rates are rising, and more increases are anticipated from the U.S. Federal Reserve – all occurring in the context of fast-moving geopolitical events surrounding the Russian incursion into Ukraine. What will happen with commercial loan activity and distressed debt? Is the war in Ukraine posing any risk to demand for leveraged loans? Is there a U.S. recession looming? What are the leading indicators? Between April 12 and 22, 2022, SRS Acquiom surveyed loan professionals from various organizations – including investment banks, law firms, bank and non-bank lenders – for their views.
What will be the impact from anticipated rate increases?
Nearly two-thirds (62%) of respondents to this survey foresee an impact from anticipated rate increases from the Federal Reserve. However, more than three-fourths (77%) of respondents believe that there with be an increase in distressed debt activity linked to interest rate increases. Nearly two-thirds (65%) of respondents also indicate that pricing risk will become more difficult because of the rate increases.
Most respondents believe that distressed debt activity will increase due to rising interest rates (77%).
Respondents are more diverse in their views concerning the impact of interest rate increases on demand for leveraged loan purchases. 29% of respondents predict a market glut of collateralized debt and that fewer investors are willing to invest – even at face value. Some respondents believe that leveraged loan purchases will not be impacted (21%), and one-third of respondents (33%) share that they do not know the impact to demand for leveraged loan purchases.
When we turn our attention to the war in Ukraine, a large majority (88%) believe that the war will make it more challenging to price risk. More than half (52%) of respondents think it will be more difficult to price risk overall, while 36% believe it will be more difficult only in the short term (1-3 months). Respondents indicate that it is difficult to predict the demand for leveraged loan purchases in the context of the war in Ukraine. 40% of respondents believe that leveraged loan purchases will not be impacted, with nearly one-third of respondents don’t know the impact on leveraged loan purchases (32%). Some respondents believe that fewer will be willing to invest in leveraged loan purchases due to the war 20%).
A large majority of respondents (88%) believe that it will be more difficult to price risk in the context of the war in Ukraine.
With U.S. leveraged loan investors removing cash from risky debt purchases, we asked respondents for their thoughts on where the money is going. Respondents were divided, with nearly one-third (32%) indicating that the money isn’t going anywhere: investors are sitting on their cash reserves during this time of geopolitical uncertainty. 28% of respondents shared that they don’t know, and 28% also indicated that investors are purchasing safer investments like treasuries or gold. Some respondents (12%) believe that it presents an opportunity to buy credit in the short term.
A U.S. recession is on the horizon, according to 88% of respondents. Most are watching the lasting effects of inflation as a leading indicator (91%).
Is the U.S. going into recession?
Overwhelmingly, 88% of respondents believe that a U.S. recession is looming. Respondents are monitoring the lasting effects of inflation (91%), decreasing consumer spending (73%), market responses to volatility (64%), a slowing world economy (55%), and an inverted yield curve (50%) as leading indicators. 46% of respondents also watch the price of oil as a factor contributing to a likely recession.
Download the report to see the complete survey results.
This SRS Acquiom Barometer survey has a sample size of 26 respondents representing direct lenders, investment bankers, advisors, and attorneys and was fielded April 12-22, 2022. Results should be viewed as qualitative and directional.