Can corporate America cope with its vast debt pile?
The U.S. economy may be growing much faster than pessimists had predicted, but business is still brisk for bankruptcy lawyers. “Things have really accelerated,” says Thomas Lauria, global head of restructuring at White & Case. His team is on track for record-breaking revenues this year.
Meanwhile hedge funds are spying opportunities ahead as companies are forced into financial restructurings that could see debt change hands for well below its face value. Buyers of that debt could make big gains if the company goes on to make a recovery. “It’s going to become more of a credit-picker’s market,” predicts Mike Scott, head of global high-yield and credit opportunities at Man Group GLG.
Such activity is a sign that a new era of high borrowing costs is starting to bite in corporate America, whose overall borrowings now total US$13 trillion according to United States Federal Reserve data. Businesses that grew accustomed to cheap debt during more than a decade of ultra-low interest rates must now adjust to a world where financing costs more.
A lot more; since March 2022 the Federal Reserve has raised interest rates from near-zero to a range of 5.25 to 5.5 per cent. The European Central Bank, the Bank of England and others have followed suit. Even though the Fed and the BoE holding rates recently suggests the interest-rate cycle may have peaked, many expect borrowing costs to remain high.
If that is the case, then more companies are going to need to either repay their loans, or refinance them at substantially higher cost. Over US$3 trillion of corporate debt is due for repayment over the coming five years.
“So many companies have really benefited greatly from the zero cost of capital,” says Greg Peters, co-chief investment officer
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