North American corporates to face rising debt costs despite monetary easing

News Image

By MG News | September 27, 2024 at 04:36 PM GMT+05:00

0:00

September 27, 2024 (MLN): North American investment-grade (IG) corporates could see the cost of debt rise in the next few years despite monetary policy easing, says Fitch Ratings.

IG corporate issuers have been largely insulated from the sharp rate rises in 2022 and 2023 because debt structures mainly consist of relatively low cost fixed-rate debt.

However, roughly one-third of outstanding IG bonds mature in 2025-2028 and will likely be refinanced at higher coupons.

The cost of debt for IG issuers has been rising since 2022. As of July 2024, the par-weighted average coupon was 4.15% for outstanding investment grade corporate bonds.

 For bonds maturing in 2025-2026 it is only 3.52%. By comparison, recent 10-year ‘BBB’ category issuances have been in the 5%-6% range.

This means that corporate interest expenses are likely to remain steady or even drift higher in the next 1-2 years.

Fitch expects the U.S. Federal Reserve monetary policy-easing cycle, which began with the 50 bps rate cut on September 18, to be mild and slow by historical standards, and to be accompanied by a gradual disinversion of the yield curve.

The fed funds rate is projected to fall to 4.5% by the end of this year, 3.5% by YE2025 and 3.0% by June 2026.

It also sees the 10-year yield gradually declining to 3.5% by YE2026 from 4.1% at the end of this year. U.S. corporate IG bond spreads are fairly low by historical standards but could be influenced by investor demand as monetary easing continues.

Corporate balance sheets remain healthy, which helps mitigate risk if interest costs rise, and our outlook for IG corporates is currently neutral.

The agency projects that aggregate interest coverage for a portfolio of more than 300 Fitch-rated IG issuers in North America will remain significant, at approximately 9.5x in 2024 and 2025, but decline slightly from 9.8x in 2023.

It expects total debt to EBITDA to decline slightly, falling to 2.3x for 2025 from 2.5x in 2023.

Sectors with lower interest coverage and the highest sensitivity to rate expectations include Utilities and Equity REITs, both of which had ‘Deteriorating’ outlooks in our Global Corporates 2024 Mid-year Outlook update.

Aggregate interest coverage among Fitch-rated investment grade issuers for both sectors is in the 4x-5x range through 2025.

For the utilities sector, high capex is driving the need for large debt issuances to fund growth. The sector saw record levels of issuance activity this year and accounted for 19% of North American IG issuances.

Fitch expects rising interest costs to narrow the headroom in FFO interest coverage for the sector in the next few years.

This especially applies to holding companies, which have experienced deteriorating credit metrics since 2022.

Equity REITs have high leverage relative to corporate entities rated at the same level.

The sector typically demonstrates robust liquidity, supported by large portfolios of high-quality unencumbered properties and stable contractual income, but there is significant divergence on a sub-sector level.

Higher-for-longer interest rates will be more keenly felt by sectors in secular decline, such as offices and regional malls.

Copyright Mettis Link News

Related News

Name Price/Vol %Chg/NChg
KSE100 130,686.66
280.01M
0.26%
342.63
ALLSHR 81,305.25
897.01M
0.35%
281.26
KSE30 39,945.45
114.02M
0.09%
37.19
KMI30 190,698.05
148.61M
0.61%
1163.05
KMIALLSHR 55,074.15
495.43M
0.53%
290.50
BKTi 34,568.40
28.73M
-1.07%
-372.33
OGTi 28,739.35
22.59M
1.57%
443.29
Symbol Bid/Ask High/Low
Name Last High/Low Chg/%Chg
BITCOIN FUTURES 110,455.00 110,965.00
109,200.00
170.00
0.15%
BRENT CRUDE 68.92 69.00
68.32
-0.19
-0.27%
RICHARDS BAY COAL MONTHLY 97.50 0.00
0.00
-0.75
-0.76%
ROTTERDAM COAL MONTHLY 109.80 109.80
109.80
0.80
0.73%
USD RBD PALM OLEIN 998.50 998.50
998.50
0.00
0.00%
CRUDE OIL - WTI 67.29 67.50
66.65
-0.16
-0.24%
SUGAR #11 WORLD 15.85 15.90
15.44
0.27
1.73%

Chart of the Day


Latest News
July 03, 2025 at 04:00 PM GMT+05:00

PKR strengthens 9 paisa against USD


July 03, 2025 at 03:54 PM GMT+05:00

BML Board authorizes CEO to execute deposit deal


July 03, 2025 at 03:38 PM GMT+05:00

Pakistan reaffirms reform, partnership goals at FFD4


July 03, 2025 at 02:53 PM GMT+05:00

PM reviews progress on cashless economy plans


July 03, 2025 at 02:12 PM GMT+05:00

Ghani Global secures SECP approval for share issuance



Top 5 things to watch in this week

Pakistan Stock Movers
Name Last Chg/%Chg
Name Last Chg/%Chg