With $3.1 Trillion In Debt Due And Rates Rising, Corporate Borrowers Find Themselves Fighting The Fed

Talk about bad timing.

For three S&P 500 members, F5, IlluminaILMN
, and NordsonNDSN
, 40% or more of their debt is coming due over the next year as the cost of borrowing has skyrocketed. That’s according to data compiled by Forbes from FactSet’s database.

After a decade of historically low-interest rates, these companies are extreme examples of the tough decisions corporate finance departments now face. According to S&P Global Ratings Research, $3.1 trillion of U.S. corporate debt will mature over the next three years. To put that in some perspective, that’s nearly double the combined profit of all S&P 500 Index members during their most recently completed fiscal years.

Do CFOs scoff at refinancing debt at rates double what they were at the end of last year? Or do they suck it up and go back to borrowing at a cost that could bring them to tears if the Federal Reserve pivots sooner rather than later?

Corporate finance departments haven’t grappled with these questions in more than a decade. The long period of zero or near zero rates practically made the decisions for them. It was a simple choice back then: roll the debt over by borrowing, borrowing and borrowing some more while keeping cash on hand.

“The playbook has changed,” Marquette University finance professor Matteo Arena told Forbes. “In general, companies borrowed to lock in low rates even if they didn’t need the money. That’s going to go away now.”

Arena said the dramatic uptick in rates will serve as a harsh reminder to companies about the importance of staggering their debt maturity schedules.

“If you can make something smooth versus volatile, that’s always better,” Arena told Forbes. “It would be ideal if a company could spread its debt load over time. You don’t want a huge amount coming due at once because you don’t know where interest rates will be at any given time.”

That’s to say that diversifying corporate debt schedules is equally as important as owning a wide range of stocks in your portfolio. When the future is uncertain, Arena said, the safest option is to stagger your bets.

None of this implies that the three S&P 500 members will find themselves in a crunch. On the contrary, each has solid to exceptional Altman Z-Scores, a measure of corporate credit strength.

F5 declined to comment. Both Illumina and Nordson didn’t respond to requests from Forbes.

However, others may not fare as well, and we may soon find out which companies can’t adapt to a world where cash comes at a cost.

“For some companies, this could be more serious than for others,” Arena told Forbes. “Interest rates are rising for all companies, but the wedge between high and low-risk companies is widening.”