Main Street Asset Management Chief Investment Officer Erin Gibbs and QI Research CEO Danielle DiMatino Booth join “Making Money” to discuss whether the Fed will raise interest rates this year.
Companies across the U.S. are heading toward a new era of refinancing cliffs, with billions of dollars in potential losses. High Interest RatesThis is causing a “slowly unfolding crisis.”
Companies that refinance between this year and 2030 will pay an additional $381 billion in interest due to rising borrowing rates, according to a new study from London-based consultancy Baringa. That would be the largest single increase in debt-related costs and the highest total cumulative interest payments ever faced by U.S. companies.
The biggest spending is expected to come in 2024, with more than $3 trillion in loans and bonds maturing this year. Companies refinancing that debt will likely end up paying $76 billion more in interest this year than they would have during the low-rate era, according to Baringa, who analyzed FactSet data.
“It’s tempting to see interest rates leveling off and conclude that the worst is over, but that’s simply not true,” said Syndra Maharaj, a partner in Baringa’s financial services practice. “In fact, U.S. businesses and the economy at large are only just beginning to feel the painful effects of the deep fallout from a sharp rise in interest rates that will last for years to come.”
A Wall Street sign in New York on January 27, 2023. (Photographer: John Taggart/Bloomberg via Getty Images/Getty Images)
of Federal Reserve India’s government has sharply raised interest rates in 2022 and 2023 to the highest levels since 2001 to slow the economy and tame inflation. Officials are struggling with when to ease the brakes amid signs that progress on improving inflation is slowing.
Fed policymakers have signaled in recent weeks that they intend to keep interest rates higher for longer than previously expected until they’re confident that high inflation has been overcome. Most investors now expect the Fed to start cutting rates in September or November, with only one or two cuts this year. That’s a dramatic change from earlier this year, when they expected as many as six rate cuts to begin as early as March.
The impact of rising interest rates will be “significant,” according to Baringa.
A silver lining to rising interest rates: Savings account rates
Default rates are already trending higher: The default rate for high-yield bonds rose to 3.04% at the end of the first quarter, up from 2.94% at the end of 2023, according to Fitch Ratings. By comparison, the default rate for 2022 was just 1.3%.
“American businesses and the economy as a whole are only just beginning to feel the painful aftereffects of the severe fallout from sharp interest rate hikes that will continue for years to come.”
“Default rates are already rising, they’re above pre-COVID, pre-energy crisis levels,” Nick Forrest, a partner at Baringa, told Fox Business. “But we’re not seeing a sudden spike because it’s not triggered by the onset of COVID or the Ukraine war. It’s going to be a gradual process. We’re seeing a gradual increase as higher interest debt costs move through the system.”
Nearly half of finance executives, about 47%, said their companies are “not well prepared” with financial plans to cover additional financing costs, according to a March survey by Baringa of 251 chief financial officers, treasurers, and treasurers. Another 41% said their companies would struggle to survive a high-interest rate environment, even if they have the liquidity and cash reserves they need. About 2.4% of respondents said rising interest rates and the increased cost of debt would be “potentially catastrophic.”
Federal Reserve Chairman Jerome Powell speaks to reporters at the end of a two-day Federal Open Market Committee meeting at the Federal Reserve Board in Washington, DC on March 20, 2024. (Photo: Mandel Ngan/AFP via Getty Images/Getty Images)
“In a worst-case scenario, the new high interest rate environment could trigger a decaffeinated repeat of the 2008 financial crisis – a credit crunch, but at a more gradual pace,” Forrest said. “Financial services need to prepare for this.”
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There could also be broader economic ramifications as companies take on more debt: About 22% of respondents said they would raise prices to offset rising debt refinancing costs that could push up inflation, about 17% said they would squeeze profit margins and 14% said they would implement hiring freezes.
A further 14% said they would face a liquidity crisis that could lead to the demise of their business.
