Dive Brief:

• U.S. companies that refinance debt between this year and 2030 will pay a total $381 billion in added interest expenses as borrowing costs persist at far higher levels than just two years ago, according to Baringa, a London-based consultancy.
• Companies refinancing $3 trillion in loans and bonds maturing in 2024 will likely pay $76 billion more in interest this year than they did under prior interest rates, Baringa said, citing research using FactSet data.
• “U.S. businesses and the wider economy are just beginning to experience the painful effects of a serious hangover from the rapid escalation in interest rates that will last for several years to come,” Cindra Maharaj, a partner in Baringa’s financial services practice, said in a statement. “Higher financing costs will undoubtedly pressure margins and may even lead to higher default rates.”

Dive Insight:

Several Federal Reserve officials, including Chair Jerome Powell, have recently backed away from their median projection in March that they are likely to trim borrowing costs in three, quarter-point increments this year.

Policymakers say that, during the first quarter, stalled progress in the fight to push down inflation to their 2% target prompted them to consider keeping the federal funds rate higher for longer than they anticipated.

After the rapid decline in price pressures last year, central bankers should ask, “is the disinflationary process continuing or are we landing at more of a 3% inflation level?” Minneapolis Fed President Neal Kashkari said Tuesday.

“I think it’s still too early to know, and we need to wait and see to get more confidence” in a trend of declining inflation, Kashkari said in a CNBC interview.

Default rates last quarter rose among sellers of high-yield debt to 3.04% on a trailing twelve month basis from 2.94% during the fourth quarter 2023, according to Fitch Ratings. In 2022, the default rate was just 1.3%.

In the leveraged loan market, the default rate increased to 3.8% during Q1 from 3.4% in Q4, according to Fitch Ratings.

“Highly levered issuers with declining operational performance face significant challenges to refinance near term debt, and are often unable to access the public capital markets,” Fitch Ratings said last month.

Nearly half of top financial executives (47%) said they were “not fully prepared” with a plan to cover refinancing into higher interest rates, Baringa said, citing a survey in March of 251 CFOs, financial directors and treasurers at U.S. companies.

“Companies have navigated a variety of crises over the past few decades, but you have to go back a long time to find the last instance of refinancing costs being this high,” Nick Forrest, a partner at Baringa, said in an email reply to questions.

“This is the biggest change to debt refinancing costs that we've ever seen and it presents a different wave of challenges than what companies have recently experienced,” Forrest said, noting that retail companies and the commercial real estate sector are especially vulnerable.

Among survey respondents, 29% likened the “refinancing cliff” to the worst crisis of their career, 15% voiced concern that a liquidity crisis could upend their company and 52% said the market is partially but not fully prepared for the extra cost of financing, Baringa said.

"In a worst-case scenario the new higher-interest rate environment might trigger a decaffeinated repeat of the 2008 financial crisis — a credit crunch, but at a slower pace,” Forrest said in a statement.

The Fed since July has held the benchmark interest rate at a 23-year high between 5.25% and 5.5% after the most aggressive monetary tightening in four decades.

The Fed’s preferred gauge of inflation this year will probably rise 2.7%, the National Association for Business Economics said last week, citing a median estimate by a panel of economists who in February forecast just 2.2% inflation for 2024.

Next year the core personal consumption expenditures price index, which excludes volatile food and energy prices, will likely rise 2.1%, still exceeding the central bank’s target, the NABE said.

While facing potential refinancing challenges, CFOs in the U.S. and U.K. saw scant differences among 10 debt instruments, including fixed rate bonds, interest hedging instruments and payment-in-kind notes, Baringa said, citing a survey. Many companies are probably not putting the various types of debt instruments to best use, Baringa said.

“Lenders and borrowers may be missing opportunities to lower risk by better aligning financing instruments to their unique circumstances, and both would benefit from a more consultative borrowing relationship,” Forrest said in an email.