There is a Federal Reserve building in Washington, D.C.
It is possible to leverage it softly.
With the Federal Reserve raising benchmark interest rates at a faster pace than originally expected to tame inflation, the possibility of a soft landing is fading. Higher rates are sparking an increase in leverage for Corporate America to say nothing of what would happen if they were combined with a slowdown in economic growth.
Median leverage for issuers of investment-grade corporate bonds already jumped 14% in the first quarter of 2022, when the Fed began raising rates, according to fresh figures from CreditSights Inc. That’s the biggest quarter-on-quarter move on record, the research shop says, and is “driven almost entirely by the drawdown in cash over the quarter as total debt also declined.”It is a reversal of a post-pandemic trend in which companies took advantage of low interest rates to term out their debt. Since the beginning of Covid-19, many companies have seen their cash balances increase. The combination of more cash and cheaper borrowing costs pushed net leverage to a record low across investment- grade and junk-rated companies.
The concern is that the rate hikes could combine to reverse the trend. The first quarter saw net leverage increase to 1.9 times earnings for investment-grade and 3.2 times earnings for junk-rated issuers. They are not the only ones worried about the return of leverage after a decade of low interest rates.
The negative impact of cost inflation, slowing consumer demand and supply chain disruptions was visible in the first-quarter earnings season. The forward signal from management commentary suggested that the headwinds are likely to linger.
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