The Med Faber Show: Stephanie Pomboy on the Corporate Credit Crunch
Interest rates have jumped from 0 percent to over 5.5 percent in under 18 months. That’s leading to borrowing costs such as mortgages rising to their highest level in over 15 years.
That’s also going to start to impact corporate America. As low-cost bonds roll over, companies must either pay up on higher interest rates, or pay off their debts entirely. Either way, that will increase costs and reduce profitability.
That suggests that there will be headwinds for corporate America. That will be felt more by smaller companies dependent on financing.
That includes companies that aren’t publicly traded and can’t issue stock. It also includes companies that have a cyclical product or service. They may need to refinance at a time when their cash flows are lower.
Meanwhile, the Fed has hinted at another interest rate hike. With inflation’s decline stalling out, chances are even if rates don’t move much higher, they’ll at least stay higher.
Those who need to refinance their home or car may not be able or willing to do so. That could lead to consumers hunkering down.
For corporate America, nearly $1 trillion per year needs to be refinanced in 2024 and 2025. That will occur at higher rates, which may lead some overleveraged companies to bankruptcy.