US corporate treasurers have rushed to lock in cheap borrowing costs in advance of the expected rate rise, refinancing more than $1tn each year between 2012 and 2014, according to Standard & Poor’s.
Tighter borrowing conditions will mark a turning point in the recent debt binge. Companies have had easy access to cash to write cheques for multibillion-dollar takeovers, to fund buybacks and dividend strategies — all welcomed by investors as share prices rallied off 2009 lows.
But as rates turn higher, investors may see the flip side of cheap financing. Analysts warn companies will begin defaulting in greater numbers, particularly in the energy sector, which has found itself in the line of fire as commodity prices languish.
Left unsaid? The Federal government has to refi a trillion or three each year, all of short-term debt used to finance our long-term* spending addiction. As rates rise, interest payments threaten to balloon from under $300 billion a year to nearly a trillion dollars a year, every year, for as long as interest rates remain around their historical average.