Much has been made about the effects an expected December rate hike would have on various sectors, but businesses that pay interest based on the London Interbank Offer Rate (LIBOR) have already begun to feel the pinch.
A look at the chart shows that since late 2015, three-month LIBOR has jumped over 50 basis points (bps) and is at its highest levels in more than six years.
This matters because by some estimates, as much as a third of corporate borrowing is tied to the benchmark rate.

The move began as a reaction to changes in rules governing money market funds but gained new strength as investors concluded the Federal Reserve is on the brink of raising rates. Although LIBOR remains low on an absolute basis, corporate debt levels have exploded in the past seven years and now amount to about 92% of corporate revenues. The elevated debt means even a small uptick in rates could create an outsized drain on revenue.
Given the volatile mix of slow growth, increased debt, and higher borrowing costs we believe companies that have resisted the urge to borrow will be best suited to thrive in a rising rate environment.
Disclosure:
Past performance does not guarantee future results.
The statements and opinions expressed in this article are those of the presenter(s). Any discussion of investments and investment strategies represents the presenter’s views as of the date created and are subject to change without notice. The opinions expressed are for general information only and are not intended to provide specific advice or recommendations for any individual. Any forecasts may not prove to be true. Economic predictions are based on estimates and are subject to change.
Investing involves risk, including the potential loss of principal. There is no guarantee that a particular investment strategy will be successful. Value investments are subject to the risk their intrinsic value may not be recognized by the broad market.
Definitions: Basis Point (bps): is a unit that is equal to 1/100th of 1% and is used to denote the change in a financial instrument. London Interbank Offered Rate (LIBOR) is a benchmark rate that some of the world’s leading banks charge each other for short-term loans. It serves as the first step to calculating interest rates on various loans throughout the world. LIBOR is administered by the ICE Benchmark Administration (IBA), and is based on five currencies: U.S. dollar (USD), Euro (EUR), pound sterling (GBP), Japanese yen (JPY) and Swiss franc (CHF), and serves seven different maturities: overnight, one week, and 1, 2, 3, 6 and 12 months. A total of 35 rates are posted every business day with the three-month U.S. dollar rate being the most common.
CFA® is a registered trademark owned by the CFA Institute
©2016 Heartland Advisors
heartlandadvisors.com
2016525
© Heartland Advisors
Read more commentaries by Heartland Advisors