Capital Structures and Rising Debt Costs: How Concerned Should You Be?
Interest costs have risen sharply with interest rates, sparking speculation about whether companies with loan-only capital structures might be more vulnerable than their peers in the leveraged loan market. Loan-only capital structures have become standard in the leveraged loan market over the past several years, and we have long argued that a company’s enterprise value matters more than the structure of its debt. We believe limiting accusations of deteriorating debt service capacity to companies with loan-only structures is unfair.
Consider the chart below, which compares the weighted average coupon of loan-only, bond-only and mixed capital structures. Since rates started rising in early 2021, companies with floating-rate debt in their structures have seen their weighted average coupon grow faster than those with bond-only or mixed structures, which generally have a smaller percentage of floating-rate debt. This is simple arithmetic reflecting an increase in costs, not a company’s ability to service its debts.
Context is important
Charts only tell part of the story, and it’s important to put them in context. Here are some key points to keep in mind as you think about companies’ debt service capacity and how they structure their debt.