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Corporations are still borrowing, despite high interest rates
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Rising interest rates have made a lot of people think twice about borrowing in the past year — whether that’s a potential homebuyer facing higher mortgage rates, a car buyer facing more expensive auto loans, or a business owner having to pay more for a line of credit.
But a lot of big corporations have been going ahead and borrowing anyway. Minutes from the Federal Reserve’s latest meeting show that some companies actually borrowed more in October and November, even though interest rates on their bonds have been rising.
A lot of corporations have been borrowing more lately because they don’t really have a choice.
“There’s always a certain percentage of debt that matures in any given year that will need to be refinanced,” said Winnie Cisar, global head of strategy at CreditSights.
Many companies know they’ll have to refinance more debt this year or in 2024. And instead of watching interest rates rise even further, they’re borrowing early.
The thinking? “‘Hey, even though this is a much higher number than last year at this time, we’re still going to go ahead and tap the markets, because who knows what it’s going to be 12 months from now,'” Cisar said.
In a booming economy, corporations might also borrow to build a new factory or hire new workers. But that’s not the type of borrowing you’re seeing today, said Drew Pascarella, senior lecturer of finance at Cornell University.
Right now, “companies need to borrow money either because they don’t have the money to pay back what they already owe or — maybe heading into 2023 — to pad the balance sheet, to put together a rainy day fund,” he said.
Not every company is able to borrow more right now. Investors are more nervous about lending to companies with too much debt on their balance sheets, per Chuck Tomes at Manulife Investment Management — like some smaller tech and energy firms.
“In an environment that you could see the probability of a recession continue to increase, those companies are going to be in a little bit more of a difficult situation,” Tomes said.
In other words, if the economy turns south this year, companies with too much debt might not be able to pay it back.
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