Debt Hangover Looms After US Borrowing Binge
US companies, lured by historically low interest rates, have taken on massive amounts of debt in recent years. As rates begin to rise, investors should beware of companies that might be vulnerable to increasing financing costs.
Over the last decade, US companies went on a borrowing binge. The debt/capital ratio of S&P 500 companies reached nearly 43% at the end of June (Display, left). Highly levered companies look vulnerable. Our research shows that shares of companies with the highest leverage sharply underperformed companies with the lowest debt burdens by 11.7% this year, while also lagging behind most other types of equity factors (Display, right).