The Three Financing Trends to Watch in 2024

01.30.2024

Several notable financial events in 2023 have set the stage for what is on the horizon in 2024. 2023 included diminished confidence in the banking industry after several regional banks collapsed, concerns about persistent inflation and rising interest rates. However, as the year concluded, income growth outpaced inflation and the stock market stabilized. Looking forward, investors will need to continue to navigate a dynamic landscape while markets further evolve. To that end, we’ve identified three financing trends to watch in 2024:

Trend No. 1:  Traditional Banks Threatened by Direct Lending Boom

• Market Disruption: The rapid growth of direct lending poses a disruptive threat to traditional banks, challenging their dominance in the lending landscape. Banks risk losing customers to direct lenders who can offer a more tailored and efficient lending experience, potentially leading to a decline in customer loyalty.
• Erosion of Banks’ Profits & Market Share: Traditional banks may experience a decline in market share as borrowers increasingly opt for direct lending alternatives with more flexible terms and quicker approval processes. The influx of direct lending options may also compress profit margins for traditional banks, necessitating a reevaluation of lending process and risk management approaches.
• Risk of Customer Attrition: The competitive landscape of direct lending often results in more favorable terms for borrowers, including interest rates and repayment structures that may outshine traditional banking alternatives. Non-bank entities, including private equity firms and specialized lenders, are intensifying competition, forcing traditional banks to reassess their lending strategies.
• Flexibility and Customization: Direct lending provides borrowers with unparalleled flexibility, allowing for tailored loan structures and terms that address the unique needs of borrowers. Direct lenders’ customized solutions are drawing borrowers away from conventional banking structures that may be perceived as rigid.

Both traditional banks and direct lenders need to understand borrowers’ expectations in today’s competitive lending market.

Trend No. 2:  Companies Seize Financing Opportunities Amid Interest Rate Upswing

• Optimizing Investor Appeal: Companies are structuring debt offerings to enhance investor appeal, leveraging higher interest rates to provide attractive yields that align with investor expectations. Investors, seeking enhanced returns, are showing increased confidence in companies’ debt offerings, viewing them as lucrative opportunities amidst the backdrop of rising interest rates.
• Diverse Debt Instruments with Competitive Yields: The surge in financing opportunities encompasses diverse debt instruments, offering competitive yields that make these offerings particularly appealing to a wide range of investors. Flexible terms are available for meeting companies’ specific funding and maturity requirements.
• Refinancing as an Investor Attraction Strategy: Companies engaging in refinancing initiatives are strategically positioning their offerings to attract investors looking for opportunities in the evolving interest rate landscape.
• Balancing Risk and Reward for Both Issuers and Investors: Issuers, in collaboration with legal advisors, are striking a balance between risk and reward, ensuring that debt offerings remain appealing to investors while aligning with companies' financing objectives.

Companies raising capital right now need investor-centric approaches that align with the evolving trends in the rapidly changing debt market.

Trend No. 3:  Anticipated Continued Demand for Debt

• 2023: A Record Year for Debt: Loans returned 13.32% in 2023, the best performance since the Global Financial Crisis and the second highest annual return in recorded history (since the Morningstar/LSTA Leverage Loan Index (LLI) was introduced in 1997). High-yield bonds posted well above average 2023 annual returns of 13.45%, per Bloomberg Indices.
• Investor Confidence Continues: The absence of a much-anticipated late 2023 recession was overall favorable to loans. Investor confidence in the broader economic recovery is a driving factor behind the expected sustained demand for debt as a stable investment choice. A surge in debt offerings is observed as market participants adjust to the current trend of rising interest rates, influencing both issuers and investors.
• Distressed Real Estate Debt Opportunities: Given investor confidence in a stable economy over the long-term, the immediate struggles faced by the commercial office sector present a buying opportunity for many investors.

Clients navigating the intricacies of debt transactions need to ensure compliance and strategic alignment with the evolving dynamics of the debt market.

Hirschler attorneys can provide strategic legal guidance regarding the above. Please contact a member of Hirschler’s Financing and Private Capital Formation Team for guidance and support.