{"text":[[{"start":7.32,"text":"Ryman Hospitality Properties unwittingly made one of the most fortuitously timed trades of the year. In February, the Tennessee-based owner of hotels, resorts and music venues refinanced $700mn in debt just three days before US President Donald Trump launched military strikes against Iran, which rattled corporate debt markets."}],[{"start":29.28,"text":"“I’d like to say we predicted that things were going to play out the way they did and that we were going to do this right before the announcement of a conflict in Iran,” Ryman chief financial officer Jennifer Hutcheson says. “But truth be told, it was a math exercise.”"}],[{"start":44.44,"text":"Even with the well-timed deal, Ryman is still paying 1 percentage point more in interest than it had on the debt it was redeeming from 2019. It is one of countless companies contending with a new reality across corporate America: the end of the era of ultra-low borrowing costs."}],[{"start":60.08,"text":"In September, the US Federal Reserve lifted short-term interest rates, with markets pricing in two further hikes in the next 12 months. As a result, borrowing to fund everything from AI development to Netflix shows and fast-food chains has gone up."}],[{"start":null,"text":""}],[{"start":74.72,"text":"The rise in the cost of money will redefine how businesses respond to investment opportunities and put pressure on companies struggling to increase profits to keep pace with higher interest rates."}],[{"start":85.06,"text":"It will also shake out groups that took on large amounts of debt during the borrowing bubble — obligations that may be unsustainable in a world of higher interest rates. The impact is set to be particularly significant on companies below investment grade, which are judged to have a higher risk of defaulting on financial obligations."}],[{"start":102.92,"text":"“Barring an unlikely deterioration in macro fundamentals, this is a new reality,” says Lotfi Karoui, head of client solutions and analytics at Pimco. “We shouldn’t anchor our views to the levels that prevailed from 2008 to 2022.”"}],[{"start":118.12,"text":"The low-rate era helped fund share buybacks, fuelled demand for riskier assets such as stocks and funded leveraged buyouts by private equity groups. Its undoing risks exposing distortions built up during the period when money was cheap."}],[{"start":null,"text":""}],[{"start":132.52,"text":"“Everyone thinks that low interest rates will solve every problem. But they don’t think, longer term, it creates new problems,” says Thomas Hoenig, former president of the Kansas City Fed and an early critic of the central bank’s loose monetary policy. “And that’s really the issue that we will confront.”"}],[{"start":149.16,"text":"The groups most exposed are those with junk credit ratings that have higher debt levels or are in challenged sectors such as legacy media and software, or both. Such lower-rated companies have issued almost a quarter of the $2tn in debt that US corporations will need to refinance over the next two years, according to an estimate in July from S&P."}],[{"start":169.44,"text":"They also borrow heavily from lenders such as private credit funds that often lend at floating rates. Unlike bonds, such loans adjust every quarter, and as a result the Fed’s action is already filtering through to such companies’ interest payments."}],[{"start":183.3,"text":"For smaller companies without access to credit markets, much borrowing is in the form of floating-rate loans that immediately reprice to reflect changes in broader interest rates."}],[{"start":193.12,"text":"Companies rated AAA by the likes of S&P are paying an average coupon of about 3.6 per cent but the debt is yielding an average of 5.6 per cent, according to data from stock exchange operator Intercontinental Exchange. But riskier CCC-rated bonds yield almost 18 per cent, more than double the average interest rate they currently pay."}],[{"start":214.12,"text":"Such differences between the coupon — the interest rate paid by the original borrower — and the yield — the rate of return based on a bond’s current price — reflect the value the market puts on the debt, and implicitly, the risk of default. When the yield of current debt goes up, it signifies that in the future the borrower will have to pay higher interest rates than before."}],[{"start":null,"text":""}],[{"start":232.64,"text":"“Corporate America is split between companies that can absorb higher rates and companies that cannot,” says Robert Schriesheim, the former chief financial officer of US retailer Sears who now chairs advisory firm Truax Partners. “Higher rates don’t create weaker balance sheets but they do reveal them.”"}],[{"start":250.32,"text":"The yield on long-term Treasuries, which help set borrowing rates around the world, is at its highest in over two decades as a huge issuance of AI-linked debt tests demand for safe-haven assets such as US debt."}],[{"start":262.4,"text":"The rise of borrowing costs marks a decisive break from a period of cheaper money, which started as an emergency policy following the 2008 financial crisis to support economies around the world and returned during the pandemic."}],[{"start":276.4,"text":"While there have been fits and starts of Fed tightening in the past, in 2015, 2016 and 2022, such periods were couched in expectations that rates would settle at lower levels, even if not at the near-zero per cent cost for part of the 2010s and during the pandemic. Few now expect borrowing costs to be brought down in the near future."}],[{"start":298.56,"text":"“Companies weren’t necessarily prepared for what they face this year,” says John Puchalla, executive director of leveraged finance at Moody’s, a credit rating agency. “Now there’s an expectation that rates are going to stay high and aren’t going to come down.”"}],[{"start":314.4,"text":"Money for nothing"}],[{"start":315.6,"text":"The average Fed funds rate over the past 72 years has been 4.6 per cent. The Fed rate hikes and a return to more normalised levels were always on the horizon."}],[{"start":326,"text":"But there were hopes the cheap money era still had further to go. Just three days after being sworn in for his second term in January 2025, Trump beamed into Davos to deliver a prediction: “With oil prices going down, I’ll demand that interest rates drop immediately. And likewise, they should be dropping all over the world.”"}],[{"start":346.4,"text":"After Trump’s Davos appearance, Marc Holliday, head of SL Green Realty, one of the largest corporate landlords in New York, quipped to investors that, with the “mandate from President Trump, interest rates down immediately”."}],[{"start":null,"text":""}],[{"start":359.36,"text":"Having lowered rates to near zero in 2008, the Fed had started to lift rates in 2015 before the pandemic pushed them down again. The central bank then began lifting rates again in 2022 to combat inflation from government stimulus programmes and Russia’s war with Ukraine."}],[{"start":376.64,"text":"But even then corporate executives and many investors still thought it would not be long before rates were cut again, especially with Trump’s victory in 2024. The calculus changed with the oil price shock from Trump’s war with Iran and the need for the Fed to tackle inflation."}],[{"start":392.548,"text":"The US central bank lifted the benchmark federal funds rate in September by a quarter point to a 3.75 per cent to 4 per cent range, in and of itself a modest change. But financial markets are pricing in a further rate increase in 2027, with traders consistently forecasting more increases than the Fed’s own estimates. The yield on 10-year US government debt topped 5 per cent in September, its highest level since 2007."}],[{"start":419.9,"text":"After higher-than-expected inflation figures were released on Tuesday, traders in the futures market cemented expectations of a quarter-point interest rate rise in December and added to bets on a 0.5 percentage point increase."}],[{"start":432.88,"text":"“Changes of 25 basis points of the federal funds rate by itself doesn’t amount to much. If you start getting 100 basis points, that starts having a significant impact on slowing down the economy,” says Eric Rosengren, former president of the Boston Fed. “It gets restrictive enough that you start seeing employment effects. So a lot depends on how much the Fed feels that it needs to react to the inflation.”"}],[{"start":null,"text":""}],[{"start":456.62,"text":"While rates were low, many companies benefited in two main ways: stock buybacks and acquisitions. In the 2010s, US companies bought back $6tn in stock, according to data from the Bank for International Settlements, helping their stock prices to go up. Fuelled further by tax cuts in the first Trump administration, share buybacks in 2018 and 2019 topped records from before the 2008 crisis, BIS data found. The lower-rate environment was also a boon for private equity firms as the financing for the debt they used to purchase companies was much more affordable."}],[{"start":492.12,"text":"“Throughout the 2010s, American companies borrowed to buy back shares while PE deal volumes surged,” says Song Jin Lee, global head of credit strategy at HSBC. “I think the low-rates era will be remembered for that.”"}],[{"start":506.16,"text":"More recently, however, borrowing has gone to help fund investment. This was partly due to incentives tied to Trump’s One Big Beautiful Bill, which provided sweeping tax cuts. But it was primarily linked to the build-out of AI infrastructure. It has helped prop up equity markets as well as the US economy."}],[{"start":523.56,"text":"“It’s not usual in the United States that so much of GDP is being generated by investment. So the AI boom that we’re experiencing is somewhat out of the historical experience,” says Rosengren."}],[{"start":524.06,"text":"CCC-grade pain"}],[{"start":537.2,"text":"Much of the corporate world is in a strong position to absorb the higher borrowing costs. In general, companies with the designation of investment grade, so rated as BBB- or above by agencies such as S&P and Moody’s, should be able to access debt markets at a rate relatively close to the borrowing costs of the US government."}],[{"start":555.88,"text":"“The stronger companies, those that have stronger balance sheets, those that have a wider moat and a better-defended competitive position, those that can pass on cost increases more readily, they’re going to do better,” says Schriesheim, formerly of Sears."}],[{"start":null,"text":""}],[{"start":572.64,"text":"Within subinvestment-grade or junk-rated companies, the most pain is being felt by those with the rating CCC. These companies have seen the premium at which they borrow increase considerably."}],[{"start":580.36,"text":"There has been pre-emptive action by many companies. S&P data shows that many refinanced their debt in the first six months of the year, pushing back the due dates for their debt."}],[{"start":589.56,"text":"A year ago more of the world’s corporate debt was set to mature in 2029 than in any other year. According to S&P, the peak has now been delayed to 2031, when about $832bn in debt will mature."}],[{"start":602.64,"text":"American business had an early glimpse of what the new phase of higher borrowing costs could look like. Defaults on interest payments rose in 2024 following the Fed’s rate-hiking cycle during the Biden administration."}],[{"start":613.92,"text":"This did not, however, lead to a significant increase in bankruptcies. Instead, because of loose terms agreed to by lenders, borrowers pursued so-called liability management exercises that allowed for a partial restructuring of debts. This has often only been a temporary solution, with research showing the vast majority of companies that pursued an LME transaction in recent years defaulted again on their debts within three years."}],[{"start":null,"text":""}],[{"start":637.04,"text":"“We did see a wave of soft defaults or liability management exercises. You’re probably not immune from seeing the same thing playing out this time around, too,” says Pimco’s Karoui. “But you should not basically count on any relief in funding costs to fix your capital structure. It would take something else to do it.”"}],[{"start":655.88,"text":"HSBC’s Lee warns there is a risk that weakness in CCC could start to creep up into better-rated credits. “From an investor standpoint, if you’ve got the losses in CCCs and you cannot exit out of those positions, then you might need to, in the face of redemptions, sell what you can sell, which may well be BBs,” he says."}],[{"start":675.52,"text":"Many investors maintain that a full default cycle, with missed debt repayments beyond just the riskiest borrowers, would only be brought on by recession. The US economy is currently being supported by massive capital expenditure tied to the AI build-out."}],[{"start":688.88,"text":"“It’s incredibly hard to push an economy into recession when you have the private sector, even though it’s a handful of companies, spending $1tn-plus on capex every year,” says Karoui. “I would say for now, we’re probably stuck in an environment where most of the pressure is going to be felt on low-quality borrowers.”"}],[{"start":null,"text":""}],[{"start":707.44,"text":"Others, like Julia Coronado, a former economist at the Fed, are not as sanguine. Worries are growing about the sustainability of the AI spending and the returns it will generate. “Of course the price of money matters to a sector that is extraordinarily debt-dependent,” says Coronado, who now runs economic forecasting firm MacroPolicy Perspectives. “The techies are used to just kind of free money.”"}],[{"start":728.88,"text":"The coming years will be unfamiliar territory for many corporate leaders. With the average age of chief financial officers hired at Fortune 500 and S&P 500 companies at just over 48 years old, many were just starting their careers the last time borrowing costs were this high."}],[{"start":744.56,"text":"“During the cheap money era, you didn’t have to worry about the financial side as much because you could focus more on just the growth and strategy side,” says John Graham, finance professor at Duke University’s Fuqua business school and director of its CFO Survey."}],[{"start":759.52,"text":"Many US companies will have to be more financially prudent to navigate a world in which interest rates are higher and money comes at a greater cost, Graham argues. “I think we’re getting into an era now where you can’t just say, we can just focus on growth and investment. We have to pay more attention [to] where is the money coming from.”"}],[{"start":777.56,"text":"Additional reporting by Kate Duguid"}],[{"start":784.12,"text":""}]],"url":"https://audio.ftcn.net.cn/album/a_1794580532_4803.mp3"}