Analysis: Overburdened U.S. businesses are feeling the pinch of higher borrowing costs

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Sharpie markers belonging to Newell Brands are for sale at a store in Manhattan, New York, U.S., February 7, 2022. REUTERS/Andrew Kelly

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Sep 20 (Reuters) – When U.S. consumer products company Newell Brands Inc (NWL.O) refinanced $1.1 billion worth of bonds earlier this month, it saw its borrowing costs rise by more A half.

Maker of Sharpie pens and storage containers Rubbermaid agreed to pay annual interest of between 6.4% and 6.6%, up from the 3.9% annual coupon it was paying, in exchange for an extension of the maturity of the four- and six-year bonds.

Newell Brands had seven months until it had to repay the principal of those bonds and could have held out in hopes of a cheaper debt deal. But with the Federal Reserve rushing to raise interest rates to fight runaway inflation, it only made sense that the Atlanta, Georgia-based company would refinance now, ratings agency Moody’s Investors Service said. Inc. in a note. Newell Brands is rated Ba1 by Moody’s.

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A spokesperson for Newell Brands did not respond to a request for comment. The company said in its latest quarterly results in July that it was betting on strong cash generation in the second half of 2022, driven by lower inventory spending, to help service its debt.

With a net cash debt mountain of nearly $5 billion and projected negative free cash flow this year of around $300 million, Newell Brands is one of hundreds of U.S. companies with overstretched balance sheets. .

Many of these companies have saddled themselves with cheap debt over the past 15 years and are now facing higher borrowing costs due to tighter monetary policies by central banks. This limits their ability to hire and retain employees, as well as to invest in their business and return capital to shareholders.

The most solicited companies are prolific users of debt qualified as “highly speculative” by the rating agencies. Asset manager AllianceBernstein estimates that an average company with a B3 or B- rating – highly speculative in the parlance of credit rating agencies – could see an 80% or more reduction in free cash flow due to the decline in junk debt markets.

“Our belief is that a large number of B3-rated companies, due to higher interest rates and deteriorating earnings, will experience severe free cash flow constraints,” said Scott Macklin, chief financial officer. leveraged loans at AllianceBernstein.

Moody’s analyzed 208 B3-rated companies in June and found that 124 saw their free cash flow turn from positive to negative this year. Those funded by floating interest rate loans are more vulnerable, Moody’s analysts said.

Jessica Gladstone, associate managing director at Moody’s and co-author of the report, said larger companies had more financing options and were able to secure fixed-rate financing at cheaper rates. But most companies with risky debt are heavily exposed to higher interest rates.

“If we’re talking about a typical six-times leveraged, private equity-owned, all-loan B3 company, and a relatively small B3 company, the vast majority of them will see a very important on their cash flow,” Gladstone said.

HIGHER RISK OF BANKRUPTCY

The burden of higher interest payments should lead to more companies filing for bankruptcy. Moody’s predicts that 3.7% of companies with risky debt will file for bankruptcy by August 2023, up from 2.1% a year earlier.

Among the highly indebted companies facing this risk of bankruptcy are health care provider Surgery Center Holdings, dental operator Heartland Dental, energy infrastructure service Artera Services and collision repair provider Wand NewCo 3, according to Moody’s. .

The vulnerability of these companies is partly due to variable rate loans which constitute a large part of their debt, according to Moody’s.

Representatives for Surgery Center Holdings, Heartland Dental, Artera Services and Wand NewCo 3 did not immediately respond to requests for comment.

While most indebted businesses will stay afloat in the short term, they will have to adjust to higher borrowing costs in the future. Jeremy Burton, portfolio manager for high-yield bonds and leveraged loans at asset manager PineBridge Investments, said it would be an adjustment that many companies will struggle with.

With interest rates having risen “significantly” in recent months, issuers “are likely to have to come in at a discount” with new debt, Burton said.

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Reporting by Matt Tracy in Washington; Editing by Greg Roumeliotis and Andrea Ricci

Our standards: The Thomson Reuters Trust Principles.

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