Whirlpool washing machines displayed at a RC Willey home furnishings store in Draper, Utah, on Aug. 28, 2023.
George Frey | Bloomberg | Getty Images
As interest rates flare, companies with a disproportionate amount of debt on their balance sheets may be due for a reckoning.
In recent months, investors have seen Treasury prices fall and yields rise. Just this week, benchmark 10-year Treasury yields skyrocketed to 16-year highs, having climbed above 4.80% from 4.00% less than two months ago. New data from the Labor Department on Thursday showing an enduringly robust labor market did nothing to raise hopes that yields will settle down soon. Stocks have sold off as Wall Street accepted that the Federal Reserve might keep interest rates higher for longer to crush inflation.
Now individual companies may also face escalating pressure depending on the state of their balance sheets.
Corporate debt refinancings are going to start hitting profits more urgently starting in 2024, according to Wolfe Research chief investment strategist Chris Senyek. Some $903 billion in U.S. corporate debt — excluding financial companies — comes due in 2024, up 343% from $204 billion in 2023. That rises another 42% in 2025 to $1.28 trillion and 15% in 2026 to $1.47 trillion, before starting to come down.
Since higher interest rates increase the costs of borrowing corporate debt, eating into a firm’s future earnings and cash flow, companies stuck with large amounts of debt will suffer by paying more to satisfy current obligations, and when it comes time to roll over low-cost capital with suddenly more expensive paper.
“[T]hat higher interest expense is likely to create a $5-$7/share headwind for S&P 500 operating EPS in 2024,” Senyek said.
To find the stocks that could be vulnerable, CNBC screened for companies that meet the following criteria: higher borrowing costs, characterized by a debt-to-equity ratio greater than 150%; falling earnings, characterized by a one-year negative earnings growth outlook; and those that are already breaking down, characterized by share prices trading within 5% of a 52-week low.
Source: CNBC Pro Stock Screener
General Motors, which has a debt-to-equity ratio of 165%, has been one of the targets of a continued United Auto Workers strike. Shares of the automaker fell below $30 on Thursday for the first time in three years, bringing their year-to-date slide to more than 10%.
GM ytd price chart
Appliance maker Whirlpool, holding nearly four times more debt than equity, may also be pressured by any weakness in the housing market resulting from 30-year mortgage rates that Bankrate.com pegged at a national 7.88% on Thursday. Whirlpool is also down more than 10% since the start of the year. The average analyst polled by LSEG has a hold rating.