The end of cheap money is coming for corporate America

Corporate America is moving out of the ultra-low-rate environment that followed the 2008 financial crisis and returned during the pandemic. Inflation, an oil-price shock linked to the Iran conflict and heavy borrowing for AI infrastructure have pushed rates and bond yields higher; markets expect further increases, while few businesses anticipate a quick return to cheap financing. Higher costs will constrain investment and profits, and expose assumptions built during years of easy borrowing. Cheap money helped fund $6tn in US share buybacks during the 2010s and drove private-equity acquisitions; more recently, borrowing has supported AI expansion. Ryman Hospitality refinanced $700mn just before markets were shaken by the conflict, yet still faces interest costs one percentage point above those on its old debt.

The effects are sharply divided by credit quality. Investment-grade companies with resilient businesses and pricing power can generally absorb higher rates, but highly leveraged, below-investment-grade firms - especially CCC-rated companies and businesses in challenged sectors such as legacy media and software - face steeply rising costs. Riskier CCC bonds yield nearly 18 per cent, compared with about 5.6 per cent for AAA debt; floating-rate loans pass rate increases through quickly. Lower-rated borrowers account for almost a quarter of the $2tn in corporate debt due to be refinanced over two years, although many have delayed maturities, shifting the peak to 2031. Earlier payment distress prompted liability-management deals rather than widespread bankruptcy, but most companies using these arrangements defaulted again within three years. Investors also fear losses in the weakest credits could spread to stronger ones.