Large companies were able to lock in low interest costs during the pandemic via fixed-rate, long-dated bonds, and since then earnings on their cash deposits have soared; hence many firms have more money left over for investments, to pay bills or to return to shareholders.
It’s part of the explanation for why the US economy have been surprisingly resilient. But the upshot is rates may need to remain higher for longer; this will put even more of a squeeze on small companies, which tend to have loans with floating rates or modest cash balances, or both.
On average, S&P 500 companies are today paying an effective 3.3% interest rate on their borrowings, and nearly half of this debt matures after 2030, according to a recent Goldman Sachs Group Inc. analysis. In the meantime, US corporate cash is earning close to 5%. Floating-rate leveraged loans — often used by firms owned by private equity — account for just 18% of public debt issued by US-domiciled non-financial companies.
It’s not unlike how many homeowners now have a mortgage with a low, fixed interest rate and can relax on the veranda as their money-market fund investments pay off.