Short-term borrowing rates are rising to the point where some heavily indebted U.S. companies can no longer ignore them.
A benchmark for near-term borrowing, the three-month U.S. dollar London interbank offered rate, has risen above 0.75 percentage point. That's a key threshold for junk-rated companies with about $230 billion of loans outstanding according to data compiled by Bloomberg — with Libor above that level, the borrowers will have to pay more interest over time. The increase so far could amount to about an extra $230 million of total interest expense annually for the companies.
Companies that took out floating-rate loans knew they would have to pay more to borrow once rates started rising, but they haven't experienced real increases for years. Even when the Federal Reserve started hiking rates in December, many companies did not have to pay higher rates on their loans until Libor breached key levels, because of the way their floating rates are calculated. Rising interest payments would only add to pain for U.S. borrowers that are already suffering from falling profits and higher default rates. And Libor could rise further — JPMorgan Chase & Co. strategists recently forecast it could reach 0.95 percentage point by the end of this month.
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