The American corporate world is beginning to feel the “chill”! The pain of Fed rate hikes is just beginning to show

The American corporate world is beginning to feel the "chill"! The pain of Fed rate hikes is just beginning to show

The American corporate world is beginning to feel the “chill”! The pain of Fed rate hikes is just beginning to show

That rate is falling, which is not a good sign! The lagged impact of the Fed’s rate hikes is just beginning to kick in, and corporate America is starting to feel the pain…

A key reason why Fed rate hikes are seen as having only a lagged impact on the economy is that it takes time for the impact to be felt by businesses and households that locked in loans when borrowing costs were low.

Borrowers who borrowed at floating rates have seen their world change since the Federal Reserve began raising rates more than a year ago. But for many of the companies that issued bonds and raised loans during the pandemic, the impact is only now beginning to be felt.

(83.555, 0.23, 0.27%)in interest rates over the past 15 months, most companies, especially those with poor credit Neither was affected by credit-related stress.”

However, as loans and bonds mature and borrowers are looking to roll over their funds, the cost of new financing will be significantly higher than it was a few years ago.

A key metric to watch in this regard is the so-called interest coverage ratio . The interest coverage ratio is an indicator to measure whether the pre-tax profits generated by the company can pay the current interest. The ratio is basically a risk indicator, especially when the company is experiencing a low performance and the free cash flow is fragile. It can explain Whether the company still has the ability to pay interest to avoid debt repayment risks, and whether it still has the financing ability to turn around the difficulties. Currently, corporate interest coverage ratios have been slowly declining.

That would give companies more firepower to cover higher financing costs if earnings strengthen. But Morgan Stanley’s team warned that was “not what we expected”.

Of course, a business could simply decide to pay off debt as it matures and scale back its investments. But that will weigh on the growth(5.86, 0.04, 0.69%) inflation outlook. Companies that can’t pay higher interest rates to roll over their loans risk closing down, leading to layoffs that contribute to rising unemployment.

” Investment-grade companies are scaling back their growth plans and focusing on deleveraging, while lower-rated peers are struggling,”  S&P Global Ratings’ Peter Brennan and Umer Khan wrote in a note Wednesday. face increasing risks from debt burdens that are coming due .”

  With the two-year U.S. Treasury yield hitting its highest level in 16 years on Thursday, the headwinds felt by corporate America will only grow stronger as the day goes on.

At present, the delayed impact of the Fed’s interest rate hike may have just emerged, and the American business community may gradually feel the pain from the Fed’s interest rate hike.

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