One of the reasons why the #fed paused #ratehikes last week was the lagged effects of interest rates into the real economy. It can take several months for it to fully absorb the impact of high interests rates. The chart below is a great example: #zombie companies, those that do not produce enough earnings to cover interest payments on their debt (ICR<1) are currently paying, on average, 4.7%. If rates are where they are now, AND spreads are where they are now, these companies, which by definition, have below investment grade ratings, will renew those debts at a much higher rate (8.4%) when their current debts mature, almost doubling their interest expense. That is of course, if they find investors willing to bear the risk of lending them money. It is estimated that 10-13% of US companies are zombies. It’s also estimated (consensus) that only around 4% of US companies will default during this cycle, in the base case scenario. We’ll see.
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