Low-rated companies are hurting at a time when U.S. borrowing costs are soaring
白云追月素
发表于 2023-9-28 20:29:35
194
0
0
Petco's interest costs soared to nearly a quarter of its free cash flow in the second quarter of this year. When Petco borrowed the money in early 2021, interest costs were less than 5% of cash flow.
Now, executives say reducing that burden is a top priority for the company. Petco Chairman Ronald Coughlin said on the company's August earnings call that debt reduction was one of Petco's three key capital allocation initiatives.
This is not Petco's problem alone. During the coronavirus pandemic, many companies had borrowed money at ultra-low interest rates through so-called leveraged loans. The debt is often used to fund private-equity buyouts or borrowed by companies with low credit ratings, with interest rates adjusted to the Fed's recent rate hikes.
Now, interest costs in this $1.7 trillion debt market are becoming unbearable for these companies, and Fed officials are predicting that short-term rates will remain high for some time.
Nearly $270 billion of leveraged loans have poor credit and could be at risk of default, according to ratings firm Fitch. As the US Federal Reserve has raised interest rates, credit conditions have deteriorated and are beginning to show signs of stress not seen since the outbreak of COVID-19. Excluding a surge in 2020, defaults over the past 12 months have been the highest since 2014.
The pressure comes at a time when leveraged loan funds are doing well. Investors had worried that rising rates would hurt risky borrowers, especially if they triggered a recession. But the strength of the U.S. economy has helped borrowers weather higher interest costs, while the plunge in fixed-rate, low-interest bonds has underscored the advantages of floating rate debt.
The gains from leveraged loans could easily be wiped out if the Fed's tightening moves wreaking some havoc on the U.S. economy and triggering a wave of defaults, says James St. Aubin, chief investment officer at Sierra Mutual Funds. Sierra holds floating-rate debt in its Tactical All Asset Fund, which uses an algorithmic model to buy and sell assets based on their performance.
"The asset I'm most worried about is bank loans," he says.
Apparel company Hanesbrands (HBI) has nearly $1.9 billion outstanding on two bank loans, with interest payments ranging from 7.2% to 8.9%. Chief Financial Officer Scott Lewis said in August that the company was working to improve leverage, or the ratio of debt to earnings, and to lower interest costs by using "all of our free cash flow to pay down reduced debt."
The company has made progress, paying down $100 million in debt in the first half and plans to pay down another $300 million in the second half. But cash flow has exceeded interest expense in only two of the last six reported quarters. In the most recent quarter, interest expense of $75 million almost completely ate up free cash flow of $78 million.
Standard & Poor's cut Hanesbrands' rating to B+ from BB- last month. Moody's cut Petco's rating from B1 to B2 in June, further lowering it in speculative grade.
In a sign of hope for investors and companies, chief financial officers and Wall Street analysts are increasingly confident that the economy is emerging from recession. In their view, the resilience of the labor market has helped keep consumer spending healthy, which can drive corporate revenue growth. The cash can be used to pay off high-interest debt.
"So far, borrowers have done a good job managing the increased interest costs because the economy is in better shape than many expected at the beginning of the year," said Hussein Adatia, who manages a portfolio of distressed corporate debt at Westwood in Dallas. 'The number one risk to leveraged loans is a sharp economic slowdown,' he said.
This will create more challenges for issuers such as Hanesbrands or Petco. Americans are already buying fewer pets, and Hanesbrands recently announced it was selling its Champion business after an activist investor opposed management.
According to the Fed's senior loan officer survey, banks are becoming more stringent about who they lend to, making it harder for companies with lower ratings to refinance. Fitch expects about $61 billion of those loans to default over the next two years, with the "vast majority" expected to occur by the end of 2023.
Some investors worry that the tightening of lending standards has come too late. Years of ultra-low interest rates have left investors hungry for yield and offered favorable terms to borrowers.
Adatia said that historically, creditors have recovered about two-thirds of the initial loan during a default, but he expects that share to be much lower now.
"The overall quality of loan documents is very bad right now," he said. "This is the product of 15 years."
CandyLake.com 系信息发布平台,仅提供信息存储空间服务。
声明:该文观点仅代表作者本人,本文不代表CandyLake.com立场,且不构成建议,请谨慎对待。
声明:该文观点仅代表作者本人,本文不代表CandyLake.com立场,且不构成建议,请谨慎对待。
猜你喜欢
- Musk mocks iPhone 16 for lack of innovation. $50 billion in research and development costs is too cost-effective!
- Buffett continues to sell $900 million worth of Bank of America stocks! At this point, all investment costs have been recovered
- 33000 workers strike at Boeing factories in the United States, union says strike 'may continue for some time'
- Still not giving up! Nippon Steel and US Steel send letter to Biden regarding merger and acquisition deal
- The US Department of Justice has been singing high in its anti-monopoly war, and this time it is targeting the Visa debit card business?
- Elon Musk: Tesla Robotaxi travel costs will be similar to those of buses
- US regulatory agencies say Boeing safety improvements are crucial for profitability
- Starting from 5999 yuan! IPhone 16 material cost breakdown revealed: Apple costs 2900 yuan
- Tesla launches autonomous taxi Cybercab, with a cost of less than $30000 expected to start production in 2026
- Tesla Enters Robotaxi Market with Cost Below $30000
-
【英偉達の需要が高すぎる?SKハイニックス:黄仁勲がHBM 4チップの6カ月前納入を要求!】SKハイニックスの崔泰源(チェ・テウォン)会長は月曜日、インビダーの黄仁勲(ファン・インフン)CEOが同社の次世代高帯域 ...
- 琳271
- 昨天 17:54
- 支持
- 反对
- 回复
- 收藏
-
ファイザーが前立腺がんを治療する革新薬テゼナ& ;reg;(TALZENNA®,一般名:トルエンスルホン酸タラゾールパーリカプセル)は2024年10月29日に国家薬品監督管理局(NMPA)の承認を得て、HRR遺伝子突然変異 ...
- 什么大师特
- 1 小时前
- 支持
- 反对
- 回复
- 收藏
-
南方財経は11月5日、中央テレビのニュースによると、現地時間11月5日、米ボーイング社のストライキ労働者が59%の投票結果で新たな賃金協定を受け入れ、7週間にわたるストライキを終えた。ストライキ労働者は11月12 ...
- Dubssgshbsbdhd
- 3 小时前
- 支持
- 反对
- 回复
- 收藏
-
【マスクはテスラが携帯電話を作ることに応えた:作れるが作らないアップルとグーグルが悪さをしない限り】現地時間11月5日、有名ポッドキャストのジョローガン氏のインタビューに応じ、「携帯電話を作るのは私たち ...
- 波大老师
- 4 小时前
- 支持
- 反对
- 回复
- 收藏