Goldman Warns European Firms Face Rising Borrowing Costs Amid Debt Pressure

Goldman Sachs says sovereign debt concerns are increasing European companies' borrowing costs, potentially reducing cash available for investment or shareholder returns. European corporate borrowers face pressure from higher government bond yields and expanding bond issuance by U.S. hyperscalers, which increases competition for capital. Goldman analysts say tightening credit conditions and rising interest expenses are beginning to reduce corporate margins.

Goldman forecasts hyperscaler debt issuance of $420 billion in 2027, compared with $250 billion in 2026, in an October 23 note. Goldman says worldwide financing for artificial intelligence projects could double to $300 billion as technology giants increasingly fund AI investment through bond markets.

France's 10-year government bond yield exceeded 5% on October 21, reaching that level for the first time since 2002. The yield premium over Germany's 10-year Bunds reached more than 177 basis points the following day amid concerns about risks spreading elsewhere in Europe. Developed economies, including the United States, the United Kingdom and Japan, have experienced similar borrowing pressures this year.

Goldman analysts say European investment-grade yields have increased about 30 basis points since early September, reaching 4.4%. Goldman analysts put the increase in spreads over the sovereign risk-free rate at some 24 basis points, bringing spreads to 117 basis points. European high-yield borrowing costs have increased around 90 basis points to 7%. High-yield spreads have expanded by 94 basis points to 354 basis points.

Goldman says interest expenses among Stoxx 600 companies have risen from 1.25% of sales to 1.85% since 2022 as refinancing became more expensive. Goldman analysts calculate that the 60-basis-point increase has reduced earnings by more than 5% during that period. Companies facing debt maturities or interest-rate resets could experience greater pressure.

Goldman analysts put the average maturity of Stoxx 600 debt at around seven years. Goldman analysts say one quarter of that debt requires refinancing within the next two years. Goldman analysts identify a further quarter as floating-rate debt. Goldman analysts therefore warn that higher rates could affect around half of the debt relatively quickly.

Goldman analysts identify weak cash generation, limited pricing power, imminent refinancing and substantial floating-rate debt as particular vulnerabilities. Goldman analysts say rising yields increase financing expenses, while wider spreads add pressure for companies approaching refinancing. Goldman analysts say management teams are increasingly prioritizing debt reduction, potentially redirecting cash from investment or shareholder returns.

However, Goldman analysts do not anticipate a systemic credit event. Goldman analysts expect cheaper commodities, moderating inflation and interest rates, and stronger growth in 2027 to ease balance-sheet pressure. Goldman analysts instead view more expensive debt as an increasing limitation for some companies, compounded by slowing earnings growth. Goldman forecasts European earnings growth below 10% next year, compared with about 20% this year. Goldman forecasts U.S. earnings growth below 15% next year, compared with more than 30% this year.

Mike Bell, head of market strategy at RBC BlueBay Asset Management, says higher borrowing costs are unlikely to create major difficulties for investment-grade corporate borrowers. However, Bell says high-yield credit investors need greater selectivity. Bell sees increasingly attractive risk-adjusted opportunities relative to equities in government bonds, investment-grade corporate credit, securitized credit and selected high-yield credit. Bell urges multi-asset investors to compare available fixed-income yields with realistic expectations for U.S. equity returns over coming years, given currently elevated cyclically adjusted price-to-earnings ratios. Bell says that comparison makes fixed income increasingly attractive against many developed-market stocks.