European companies are facing increasingly expensive financing, which could limit investment, development and payments to shareholders. Analysts at the US investment bank “Goldman Sachs“ warn that the pressure comes from both higher yields on government bonds in Europe and the growing demand for capital for the development of artificial intelligence.
According to the bank's forecast, bond issuance by large American technology companies could grow from $250 billion in 2026 to $420 billion in 2027. Global financing for artificial intelligence projects could double to $300 billion.
Higher yields also make corporate debt more expensive
The pressure is already being felt in European markets. On October 21, the yield on 10-year French government bonds exceeded 5% for the first time since 2002, raising concerns that France's financial difficulties could spill over to other European countries.
When governments pay higher yields, companies also have to offer investors a higher return to raise funds. Since the beginning of September, borrowing costs for European companies with a solid financial position have reached 4.4%, while for riskier companies - 7%.
For companies in the “STOXX Europe 600“ index, which covers 600 large European companies, interest costs have increased from 1.25% to 1.85% of sales compared to 2022. According to “Goldman Sachs“ the rise in the cost of financing has already reduced company profits by more than 5%.
Almost half of debt is at risk
The most vulnerable are companies that generate little cash from their core activities, have significant refinancing obligations or use variable-rate loans.
About a quarter of the debt of companies in the “STOXX Europe 600“ must be refinanced in the next two years. Another quarter are variable-rate loans. Thus, nearly half of the liabilities of the companies in the index could be affected relatively quickly by the change in financing conditions.
“Rising yields increase their financing costs“, analysts at “Goldman Sachs“ warn.Companies that took out loans several years ago at lower interest rates may have to replace them with new financing at less favorable terms. This could force them to postpone building plants, purchasing equipment or expanding operations. Among the possible consequences are lower dividends or fewer share buybacks.
Profit growth expected to slow
“Goldman Sachs“ predicts that European companies' profits will grow by less than 10% in 2027, after an increase of about 20% in 2026. For US companies, profit growth is expected to slow from more than 30% to less than 15%.
Analysts do not necessarily expect the rise in borrowing costs to lead to a major financial crisis. Lower commodity prices, slowing inflation and a possible reduction in interest rates could ease the pressure on businesses.
However, higher bond yields are creating more competition for stocks. Government bonds, corporate bonds with good credit ratings and some riskier bonds may become more attractive to investors when expected returns and risk are compared.