Search
 
News

Junkiest Loan Issuers Should Prepare for Pain

As LIBOR rises—blowing past 1% yesterday, for the first time in nearly two years—more struggling junk-rated borrowers may end up with negative cash flow, unable to pay interest payments on their loans.

By Paula Seligson & Mary Biekert | March 30, 2022 at 01:19 PM

High-risk companies that tapped the $1.4 trillion U.S. leveraged loan market have been largely insulated from rising short-term rates. Now they’re about to feel the pain.

A key lending benchmark, the three-month U.S. dollar London interbank offered rate (LIBOR), topped 1 percent on Tuesday, the highest since April 2020. That’s above the minimum level many junk-rated borrowers agreed to pay when calculating interest payments on their loans. Until recently, an increase in rates might not have had much real impact on these corporations, but now this expense will likely rise over time for most borrowers.

Increases in these costs could push the weakest loan borrowers to the point where their businesses aren’t generating enough cash to cover all their expenses, known as negative free cash flow, said Steve Hasnain, who invests in leveraged loans at Pinebridge Investments. Many of these companies are already facing pressure from surging commodity and labor costs, he said.

Complete your profile to continue reading and get FREE access to Treasury & Risk, part of your ALM digital membership.

Your access to unlimited Treasury & Risk content isn’t changing.
Once you are an ALM digital member, you’ll receive:

  • Critical Treasury & Risk information including in-depth analysis of treasury and finance best practices, case studies with corporate innovators, informative newsletters, educational webcasts and videos, and resources from industry leaders.
  • Exclusive discounts on ALM and Treasury & Risk events.
  • Access to other award-winning ALM websites including PropertyCasualty360.com and Law.com.

Already have an account?

 

Recommended Stories

Fed Reaffirms Inflation Resolve

Fed Reaffirms Inflation Resolve

Craig Torres |

Minutes from the FOMC’s December meeting include an unusually blunt warning to investors, cautioning against underestimating the Fed’s will to keep interest rates high for some time.

Corporate America Embraces Commercial Paper

Corporate America Embraces Commercial Paper

Alexandra Harris, Liz Capo McCormick & Jack Pitcher |

The short-term IOUs look increasingly attractive compared with locking in longer-term borrowing in a market beset by turbulence.

Analyst Who Exposed LIBOR Is Now Targeting SOFR

William Shaw & Alexandra Harris |

Large Wall Street dealers already stand to lose $5 million to $10 million if the spread between overnight and term SOFR moves against them by just 1 basis point, and their exposure grows with every new transaction.

Treasury & Risk

Join Treasury & Risk

Don’t miss crucial treasury and finance news along with in-depth analysis and insights you need to make informed treasury decisions. Join Treasury & Risk now!

  • Free unlimited access to Treasury & Risk including case studies with corporate innovators, informative newsletters, educational webcasts, and resources from industry leaders.
  • Exclusive discounts on ALM and Treasury & Risk events.
  • Access to other award-winning ALM publications including PropertyCasualty360.com and Law.com.

Already have an account? Sign In Now
Join Treasury & Risk

Copyright © 2023 ALM Global, LLC. All Rights Reserved.