Companies around the world could be in trouble in the first half of 2024 as the rising cost of debt due to heightened interest rates threatens a half-trillion dollar refinancing scramble, according to Reuters.
Businesses, particularly across Europe, the Middle East and Africa, that previously borrowed when rates were low and businesses that need to take out new loans to meet capital requirements need around $500 billion in the next half-year for refinancing to avoid cutting operations, according to Reuters, citing analysis from restructuring consultancy Alverez & Marsal. The value of company loans in the next six-month period is projected to be higher than any other similar period until the end of 2025, threatening businesses that will need to borrow during that time and risking corporate failures.
“Interest rate rises are becoming more and more of an issue for companies, particularly those zombie businesses that have been holding on with a sustained period of low interest rates but just barely able to service their debt,” Julie Palmer, partner at U.K. restructuring firm Begbies Traynor, told Reuters. “I think we’re now starting to finally see the fall of some of the zombies.”
A failure to afford new capital amid higher rates and stricter rules could lead to corporate failures in the form of insolvencies or layoffs, according to Reuters. “Zombie” businesses, meaning those that rely on support from governments, lenders and investors to remain operational, could begin to close as the price of debt makes the businesses unsustainable.
“Central banks are taking a breather but aren’t ready to say rate hikes are over,” Nicola Marinelli, an assistant professor of finance at Regent’s University, told Reuters. “Banks and private equity shops have waited to see if the tide turned but higher rates don’t allow hiding anymore.”
Tougher capital rules for banks, under the voluntary international regulatory accord Basel III, have led some lenders to tighten credit terms and even cut smaller businesses as customers as profitability calculations change, according to Reuters. Banks’ reluctance to lend out more cash amid high rates and tougher rules could shock companies that have been relying on cheaper debt.
The U.S. has also seen high interest rates, with the Federal Reserve hiking its federal funds rate 11 times since March 2022 in an effort to combat high inflation. Inflation peaked at 9.1% in June 2022 and has decelerated since but remained elevated in August at 3.7%.
Bankruptcies in the U.S. have begun to rise for the first time in over 13 years after declining steadily. Personal bankruptcies were up 18% year-over-year in August at 39,000, with the total U.S. household debt reaching a new high of 17.06 trillion.
Will Kessler on October 6, 2023
