The Secret to Earning $1 Billion by Doing Nothing

Until recently, I thought rising interest rates were — on balance — bad for businesses. In fact, many big companies are benefiting from the fastest rate-hiking cycle in decades, at least in purely financial terms.

Their combined net interest expenses – interest payments on borrowings adjusted for the interest received on cash and cash-like investments – have declined since the Federal Reserve began tightening monetary policy early last year.

Large companies were able to lock in low-interest costs during the pandemic via fixed-rate, long-dated bonds, and since then earnings on their cash deposits have soared; hence many firms have more money left over for investments, to pay bills or to return to shareholders.

Higher Rates Lower Expenses

It’s part of the explanation for why the US economy has been surprisingly resilient. But the upshot is rates may need to remain higher for longer; this will put even more of a squeeze on small companies, which tend to have loans with floating rates modest cash balances, or both.

On average, S&P 500 companies are today paying an effective 3.3% interest rate on their borrowings, and nearly half of this debt matures after 2030, according to a recent Goldman Sachs Group Inc. analysis. In the meantime, US corporate cash is earning close to 5%. Floating-rate leveraged loans — often used by firms owned by private equity — account for just 18% of public debt issued by US-domiciled non-financial companies.