Ever so subtly, the high interest rates of the past year have started to separate the viable businesses from the ones sustained by cheap money. Expect 2023 to kick that process into high gear.
Interest rates started surging in late 2021 as the Federal Reserve began to acknowledge that inflation wasn’t “transitory,” but relatively few companies have had to deal with the consequences. Many of them met their near-term borrowing needs during the first two years of the Covid-19 pandemic, when rates were unusually low. Defaults and bankruptcies have begun to inch up since then, but only slowly and from extraordinarily low levels.
So far, prominent blowups have been few and far between. In June, the cosmetics giant Revlon Inc. — owned by billionaire Ron Perelman’s MacAndrews & Forbes — filed for bankruptcy amid struggles to keep pace with new brands. In August, drugmaker Endo International Plc initiated Chapter 11 proceedings, faced with lawsuits over its role in the US opioid epidemic. Then there were the crypto implosions, punctuated by the collapse of Sam Bankman-Fried’s FTX. Yet those episodes were idiosyncratic and, by total dollar amounts, still a far cry from the fallout of a typical recession.
But corporate America’s reckoning with its addiction to cheap debt is coming — and possibly as soon as next year. While high-yield bond maturities still look manageable for the next 12 months, the wall of expiring debt looks much more daunting in 2024. Companies will have to start refinancing well in advance of that, and they’re likely to find that the cost has risen too high for otherwise flimsy business models to withstand. At today’s rates, all-in yields on high-yield debt sit around 8.67% at the time of writing, far above the 2017-2021 average, according to Bloomberg data.
