Monday, March 20, 2023

Remember our in-depth series on corporate debt loads back in January, when we analyzed 22 companies in the S&P 500 that seemed to have alarmingly high debt in our world of rising interest rates?

Well, the crack Calcbench research team was at it again recently. Now they’ve analyzed the debt loads of 75 companies in the S&P 500 — and the picture is as alarming as before.

First, a recap. Corporations loaded up on debt in the 2010s, an era of rock-bottom interest rates. Now much of that debt is coming due, except the 2020s have been an era of rising interest rates. So those companies seeking to roll over that older debt might be in for a rude awakening, as their interest expense costs jump sharply.

Consider Figure 1, below. It shows how total debt among S&P 500 non-financial firms surged from 2016 through 2022. (Keep in mind that we don’t have all filings for 2022 yet, including some large firms with significant debt.)

Likewise, interest expense among S&P 500 non-financial firms also surged from $133 billion to $156.8 billion — an increase of 18 percent, and we’re still not done yet with 2022 filings. See Figure 2, below.

Now back to the 75 firms we mentioned previously.

Those 75 companies were carrying a total of $1.206 trillion in debt against  $4.741 trillion of assets. Nearly $382 billion, or 28 percent of that total debt, will mature in the next five years. The weighted average interest rate for debt maturing in the next five years ranged from 2.53 to 4.96 percent. See Figure 3,  below.

The big question: What will happen to those companies when their debt comes due? Will they refinance at higher rates, and see their interest expense jump? Will they retire the debt, at the risk of shrinking their cash reserves? Will they raise new capital through an equity offering of some kind and dilute current shareholders? Something else?

To make matters even more complex, until this week it was pretty much a foregone conclusion that the Federal Reserve would keep raising interest rates. Now, thanks to the collapse of Silicon Valley Bank and Signature Bank, and yellow alerts about the health of other regional banks, the Fed may well decide to hold rates steady or even cut them later this year. So maybe those firms with debt coming due will find an escape hatch after all.

Specific examples

Companies do disclose their schedule of debt instruments and interest rates in the footnotes. The table below shows examples from the 75 companies we studied, and the effect of rolling over the debt is significant.

For example, Thermo Fisher ($TMO) has two senior notes coming due in 2023 for a total of $3.17 billion, paying an average interest rate of 1.44 percent. Let’s assume that Thermo rolls over that debt at 4.58 percent, the Federal Funds Rate this week. In that case, Thermo’s annual interest expense on that debt rises from $45.6 million to $145.1 million.

Calcbench has an updated research note going into more detail about these findings, including a watch list of other companies whose interest expense already equals a substantial portion of net income. You can download the note from our Research page, or revisit our original series on corporate debt to see how you can conduct your own analysis with Calcbench resources.

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