Lending standards to tighten amidst rising costs, geopolitics

Other factors include incomplete market recovery post-COVID and rising interest rates.

Lending standards will tighten in the coming year on the back of rising costs and geopolitical issues, restructuring experts told AlixPartners.

In a survey of 200 legal, financial, and investment professionals, 86% of experts anticipate business disruptions.

Nine in 10 said that these pressures will affect profitability, and over 39% expect the impact to be greater compared to last year. 

Key pressures include high material costs (53%), rising interest rates (49%), and labour costs (49%), alongside an incomplete market recovery post-COVID (36%). Geopolitical tensions, especially in light of the upcoming US elections, are expected to further affect global trade, capital flow, and company liquidity.

More than half (52%) of respondents also expect lenders to be more scrutinising, proactively alerting borrowers to take appropriate actions against risks. This is significantly up from 31% last year, suggesting a recalibration of risk appetites to address challenges amidst the current economic cycle.

Traditional banks are exercising caution, reducing their involvement with higher-risk customers. Despite record dry powder in the private debt and equity market, investors are focusing on opportunities where capital injection can drive significant profit improvement or growth.

However, 74% of respondents are optimistic about improving profitability, up from 39% last year. Nearly all (95%) believe that debt financing and capital availability will remain stable or increase in the next 12 months.

AlixPartners advises companies to focus on liquidity and cash generation, realistic refinancing expectations, fundamentals, and enhanced agility to navigate these challenges.