A Wave Of Refinancing Is Coming For Companies, And That’s A Risk

A Wave Of Refinancing Is Coming For Companies, And That’s A Risk
Stéphane Renevier, CFA

3 months ago3 mins

It’s not a huge mystery how corporate profits have managed to resist crumbling in the face of soaring interest rates: during the pandemic, companies took advantage of historically low interest rates and locked in dead-cheap financing. But that won’t last forever. As their current debt reaches maturity, companies will have to refinance. And that’s when we’ll really start to feel the impact of the higher interest rates.

The Swiss-based Bank For International Settlements (BIS) has been thinking a lot about this and crunching the numbers. Here’s what it says:

Smaller companies have a bigger and more pressing need to refinance. They’ll not only need to refinance sooner than their heftier peers, but they’ll also need to refinance more significant amounts – about 10% of their total revenues in each of the next three years, compared to less than 4% for major corporations. That means those bigger firms will have a sturdier shield against the headwinds of rising interest rates. And that’s already been a key factor behind the stronger performance of the giant companies compared to their punier peers over the past year.

US firms aren’t in a rush to refinance their debts just yet. Their debt maturity is spread out more evenly compared to companies across the other advanced economies, with the bulk of it due for refinancing in 2026-27. This is mostly because they rely more on bonds and notes, which typically have longer terms, rather than shorter-term loans and other borrowing methods. For companies in other advanced economies, the situation is more challenging: they have more immediate refinancing needs, with significant amounts of debt coming due for refinancing a lot sooner. This difference in the refinancing timeline is a key reason why US stocks have outperformed their global counterparts over the past year.

Emerging market companies are most vulnerable here. They typically depend on bank loans, which often have shorter maturities, and so the refinancing challenges hit them a lot sooner. In fact, these companies are approaching their busiest refinancing phase in the next year, so if interest rates stay high, these emerging market companies could be the first to come under pressure.

Now, refinancing at higher rates doesn’t have to be a calamity. But it does present a challenge: if their financing costs get pricier and an economic slowdown shrinks their revenues, companies might have to scale back their operations or accept much lower margins. More vulnerable ones – where interest payments eat up more of their revenue – could default. And this scenario could lead investors to demand higher risk compensation (for example: in the form of higher interest rates for corporate debt), which would further hike financing costs for companies and intensify the strain. Historically, it’s in these conditions that stock markets struggle the most.

So our hope lies in a resilient economy and lower inflation, where robust revenue growth and reduced costs help companies smoothly navigate through these refinancing challenges. But until all of that materializes, don’t ignore the risks. In financial markets, remember the wind often turns without a warning.

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