June 5, 2024 U.S. Firms Face $380B Extra Costs From Higher Rates

Largest expense expected to occur in 2024 with $75.6 billion in added expense on $3.2 trillion in loans and bonds.

Companies across the U.S. are facing a refinancing cliff with billions of dollars more required to service debt at current projections in a higher-for-longer interest rate environment. According to new research by global consultancy Baringa, U.S. companies may be subject to approximately $381 billion¹ in additional interest expense on current loans and bonds at projected interest rate levels between 2024 and 2030. Baringa’s analysis shows that this adds up to the largest single increase in debt-related costs and highest cumulative interest payment total ever faced by U.S. companies.

Baringa analyzed FactSet data to calculate the additional interest on all loans and bonds issued by U.S companies before December 31, 2023, then gauged how much more those loans would cost if refinanced at the predicted interest rate at time of their maturity. While interest rates have remained flat for nearly 10 months, the drag in maturation of medium-term loans and bonds means that refinancing costs will continue at elevated levels.

With more than $3 trillion in loans and bonds maturing in 2024, the incremental cost of refinancing this debt for U.S. companies this year alone is projected to be nearly $76 billion versus current rates, and more than $166.4 billion versus historically low 2021 rates. The additional expense is expected to decrease each subsequent year until 2028 when it moves higher, then continues to decline to about $23 billion versus current rates and $64 billion versus 2021 rates in 2030.

Cindra Maharaj, partner in Baringa’s Financial Services practice, said, “It’s tempting to look at plateauing interest rates and conclude that the worst is behind us but that’s simply not true. In fact, U.S. businesses and the wider economy are just beginning to experience the painful effects of a serious hangover from the rapid escalation in interest rates that will last for several years to come.”

“The consequences are significant. Higher financing costs will undoubtedly pressure margins and may even lead to higher default rates. Consumers will feel the impact as well. This analysis comes on the heels of a one-month 12.7%[1] decline in the consumer sentiment index for May.”

In addition to its data analysis, Baringa surveyed 251 Chief Financial Officers, financial directors, and treasurers from U.S. companies to determine how prepared firms were for managing through this unprecedented financial crisis. Nearly all respondents agreed their companies faced increased interest rate expense with 61% expecting a “significant increase.” Additional findings include:

• 88% expect their products or services to become more expensive for customers and consumers due to higher interest rates
• 47% acknowledged their companies were “not fully prepared” with a financial plan to cover the extra cost of refinancing
• 29% categorized this challenge as on par with the worst crises faced in their career
• Nearly 15% expressed concern about a liquidity crisis that could end the business

Managing through these challenges is a first for many senior finance leaders. Only 20% of respondents were involved in strategic decision-making at large U.S. firms before 2008 – the last time interest rates were this high.

Maharaj said: “Business leaders today are navigating a dynamic macro environment that hasn’t been seen in more than a decade. They will need to employ different strategies and tools to adapt to a new normal and help their companies to not simply survive but thrive in spite of the challenges. Better forecasting, more complex financial scenario planning and stress testing are essential tools to ensuring ample liquidity and optimizing refinancing strategies.”

[1] Surveys of Consumers (umich.edu)

Methodology

Refinancing cost data was based on corporate loans and bonds available via data provider Factset as of May 1, 2024. Assumptions about future interest rates used SOFR swap rates as proxies, and U.S. Treasury yield curves as of April 30, 2024. References to 2021 interest rates are based on the average interest rate in the U.S. over the course of 2021.

The survey of CFOs and treasurers was conducted by independent market research consultancy Censuswide. The survey comprised of 251 CFOs, financial directors, and treasurers working in large firms (500 headcount and $60m turnover minimum) across the U.S. and was conducted online March 13-22, 2024.

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