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Big corporations aren’t likely to avoid the bite of higher interest rates forever, particularly with an estimated $1.8 trillion of U.S. corporate debt coming due in the next two years, according to Goldman Sachs.
That also means companies could start cutting jobs and rolling out other belt-tightening measures.
Corporations needing to refinance existing maturing debt at today’s higher rates would face higher debt costs. Goldman’s economics team, led by Jan Hatzius, expect a 2% increase in interest expenses for corporations in 2024 and a 5.5% jump in 2025, according to a new client note.
They also found that a bigger burden in terms of interest payments typically translates to cuts in labor costs and capital expenditures, based on an analysis of data from public companies since 1965.
“We find that for each additional dollar of interest expense, firms lower their capital expenditures by 10 cents and labor costs by 20 cents, about half of which comes from reduced employment and half of which comes through lower wages,” the team wrote in a Sunday evening note.
With that backdrop, they see a potential 5,000-jobs drag on monthly payrolls growth in 2024 and a 10,000 drag in 2025.
To visualize the bigger debt picture, the Goldman team tracked a wave of corporate debt maturities that pick up later this year through 2030.
An estimated $1.8 trillion in corporate debt is set to mature through the end of 2025.
Bloomberg, Goldman Sachs Global Investment Research
Like homeowners, many big U.S. businesses were part of a pandemic borrowing blitz that helped lock in low, fixed rates, while also providing shelter from the Federal Reserve’s rate-hiking campaign in the past 16 months.
But since companies typically stagger their debt maturities for the cheapest possible overall borrowing costs, it also means a growing amount comes due through 2026.
At the same time, Fed officials expect rates to stay higher for longer, although some economists anticipate cuts to arrive next spring.
A part of the problem has been a surprisingly resilient labor market keeping inflation elevated and the economy humming, despite fears that the Fed’s rapid pace or rate hikes would trigger a recession.
Fresh labor-market data points to the economy adding 187,000 job in July, a sign that hiring may be slowing, but with wages steady at a 4.4% annual rate and unemployment retreating to 3.5% from 3.6%. Federal officials want to see yearly wage gains of 3% or less.
Confidence in a soft landing has been growing even as cracks in credit have emerged, particularly for borrowers with floating-rate debt.
See: Leveraged loan defaults hit $25 billion, head for third worst year in history, says Goldman
In a sign of potentially more stress to come, Trucking company Yellow Corp.
YELL,
on Monday filed for Chapter 11 protection, blaming “bullying” by Teamsters. The company received a $700 million pandemic bailout from the government when it was known as YRC Worldwide Inc., including loans with floating-rate debt due in September 2024.
Stocks rose Monday, with the Dow Jones Industrial Average
DJIA,
S&P 500 index
SPX
and the Nasdaq Composite Index
COMP
looking to shake off last week’s weakness after Treasury yields
BX:TMUBMUSD10Y
shot up to new 2023 highs.
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