Member Article

Inflation and increasing interest rates continued to dominate headlines in financial markets in 2023. As central banks struggled to combat inflation and interest rates continued to increase, borrowers’ borrowing costs increased throughout the year. Increased borrowing costs caused some borrowers to default on their loans, requesting waivers and amendments or initiating a restructuring of their debt. Although borrowers must face a new reality where credit is no longer cheap, some borrowers already struggle to service their debt at current levels. This negatively affects the activity levels in the debt markets as lenders take a more cautious approach and borrowers may have no other option than issuing equity to fund their operations, expansions and acquisitions.

The high yield market started the year on a strong note, but activity levels were negatively affected by the collapse of Silicon Valley Bank. After the summer holidays, the activity levels have generally been high with several repeat issuers tapping into the market. Even though the financing cost has increased throughout the year, the Norwegian high yield bond market remained robust in 2023. There has however been a substantial number of refinancings, and a limited supply of new issuers in the market. New issuers have typically found it challenging to raise funds on acceptable terms or at all, especially if they operate in an underperforming sector or a sector which is unfamiliar in the Norwegian high yield market. Certain sectors have been stronger than others, with shipping, oil service and energy among the stand-out performers.

The bank lending market in general has been active in 2023, although certain sectors, such as real estate, continue to struggle. Several banks are also unwilling to provide loans to «brown» activities such as oil and gas. Even so, energy companies operating in the oil and gas sector still seem to be able to raise funds when needed and they benefit from operating in a sector with strong profitability in 2023. We do however expect lender appetite for «brown» loans to continue to decrease as the focus on sustainable financing and sustainability in general continues to strengthen.

Real estate companies continue to struggle to refinance their debt and service their existing debt. A substantial amount of debt has been assumed over the past years and borrowers are struggling to comply with financial covenants and service interest payments. Particularly borrowers with interest cover ratio requirements in their financing agreements face a harsh reality. We expect an increase in defaults in the real estate sector going forward and consequently an increase of the number of restructurings and reconstructions going forward.

The shipping sector performed strongly with a high number of transactions throughout the year. Banks continue to be willing to lend to the sector and SVW has assisted on many debt financing transactions in the shipping sector in 2023. A highlight for the SVW ship finance team was assisting the lenders with a USD 1.4 billion facilities agreement with Frontline as borrower, where the funds were to be applied as part financing of Frontline’s acquisition of 24 VLCCs.

The financing of the green shift is still a hot topic and the renewable sector in general has been active in 2023. We expect that the focus on project financings will continue going forward and that banks will increase their exposure towards renewable companies and projects in 2024. Offshore wind has been subject debate and uncertainty in 2023 as the government is preparing for the licence auction process in Sørlige Nordsjø II. If the auction round is completed and consortiums start constructing offshore wind parks, such projects will require financing. Banks are generally supportive of Norwegian renewable energy projects, and we expect that the financing market for offshore wind will be active in 2024 and onwards.

As 2023 comes to an end and concludes an active year, we believe we may experience an even more active 2024. Interest rates are expected to stop increasing in 2024, and several economists and analysts expect interest rate cuts. Interest rate cuts will decrease borrowers’ funding costs and remove market uncertainty triggered by increased interest rates and high inflation. A stable market environment is generally good for business, and the real estate sector may also benefit from stable and maybe even decreasing interest rates in 2024. This could also increase the chance of the high yield bond market supporting new issuers. On this basis we currently have a positive outlook on 2024 for financing transactions and the financial markets.

We would like to thank all our clients and counterparties for excellent collaboration throughout 2023 and look forward to reconnecting in 2024.