Prepare for equity dilution and layoffs as companies roll over cheap maturing debt at higher rates.
Companies have been living off of ultra-low interest rates since 2008. Many companies got addicted to 14 years of ultra-low rates and abused the reality by taking on enormous sums of debt, primarily to buy back stock in order to drive Executive Options packages higher. Many executives and investors assumed that the Fed Funds rate would hover around zero percent in perpetuity.
Companies must prepare for a time when they will be required to roll over maturing debt at market interest rates that are more than double historical rates (true for both investment grade and high yield issuers).
A number of companies will choose to reduce headcount and pay off a portion of debt outstanding with cash and new equity rather than roll over debt at a higher rate.
- Reducing headcount because of external market pressures usually has a negative impact on morale and productivity.
- Using equity to pay off debt loads obviously will dilute existing shareholder positions.