Analysis: Overwhelmed US companies feel higher borrowing costs – Reuters | Jewelry Dukan

Newell Brands Sharpie markers go on sale at a store in Manhattan, New York City, on February 7, 2022. REUTERS/Andrew Kelly

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Sep 20 (Reuters) – When US consumer goods company Newell Brands Inc (NWL.O) refinanced $1.1 billion of bonds earlier this month, its borrowing costs rose by more than half.

The maker of Sharpie pens and Rubbermaid storage cases agreed to pay between 6.4% and 6.6% annual interest, on top of the 3.9% it paid annually in exchange for postponing the maturity of the Bonds at four and six years.

Newell Brands had seven months before it had to repay the principal on those bonds and could have held out in hopes of a cheaper debt deal. But with the Federal Reserve raising interest rates to combat rampant inflation, it made sense for the Atlanta, Georgia-based company to refinance now, rating agency Moody’s Investors Service Inc said in a statement. Newell Brands is rated Ba1 by Moody’s.

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A spokesman for Newell Brands did not respond to a request for comment. The company said in its most recent quarterly results in July that it is banking on strong cash generation in the second half of 2022, driven by lower inventory spending to help pay down debt.

With nearly $5 billion in net debt and projected negative free cash flow this year of about $300 million, Newell Brands is one of hundreds of US companies with stretched balance sheets.

Many of these companies have plunged into cheap debt over the past 15 years and are now facing higher borrowing costs as central banks tighten monetary policy. This limits their ability to hire and retain employees, as well as invest in their business and return capital to shareholders.

The companies under the most pressure are prolific users of debt, which rating agencies classify as “highly speculative”. Asset manager AllianceBernstein estimates that the average company with a B3 or B rating — highly speculative in rating agency parlance — could see its free cash flow fall by 80% or more as a result of the decline in junk debt markets.

“We believe that a large number of B3-rated companies will experience severe free cash flow constraints due to higher interest rates and earnings deterioration,” said Scott Macklin, director of leveraged loans at AllianceBernstein.

Moody’s analyzed 208 B3-rated companies in June and found that 124 of them experienced a change in their free cash flow from positive to negative this year. Those funded by variable-rate loans are more vulnerable, analysts at Moody’s said.

Jessica Gladstone, associate general manager at Moody’s and a co-author of the report, said larger companies have more financing options and have been able to secure some fixed-rate financing at less onerous rates. However, most companies with junk-rated debt are exposed to significantly higher interest rates.

“If we’re talking about the typical six-fold cash flow leveraged, private equity owned, all-loan, and relatively small B3 companies, the vast majority of them are going to see a very significant drop in their cash flow,” Gladstone said.

HIGHER RISK OF BANKRUPTCY

The burden of higher interest payments is likely to result in more companies filing for bankruptcy. Moody’s projects that 3.7% of companies with junk-rated debt will file for bankruptcy by August 2023, up from 2.1% a year earlier.

Highly indebted companies at risk of bankruptcy include healthcare provider Surgery Center Holdings, dentist operator Heartland Dental, energy infrastructure provider Artera Services and collision repair provider Wand NewCo 3, according to Moody’s.

According to Moody’s, the vulnerability of these companies is due in part to adjustable-rate loans, which make up a large part of their debt mountain.

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

While most indebted companies will stay afloat in the short term, they will face higher borrowing costs in the future. Jeremy Burton, portfolio manager of high yield and leveraged loans at asset manager PineBridge Investments, said this will be an adjustment that many companies will struggle with.

With interest rates rising “substantially” in recent months, issuers will “probably have to borrow at a discount,” Burton said.

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reporting by Matt Tracy in Washington; Edited by Greg Roumeliotis and Andrea Ricci

Our standards: The Thomson Reuters Trust Principles.

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