There is a school of thought that the 1990s, with its lack of major conflicts, plus unprecedented wealth created by productivity gains, were just a little bit dull. While many of us would gladly take that level of dullness in the context of our own times, the decade had a defining feature that set the pace of what became a rampant equity market. For the first time in decades, issuing equity was fundamentally cheaper than sourcing debt to finance company balance sheets and, if the forecasts for the credit market are right, then history may just repeat itself if the right combination of factors comes together.
Paradoxically, despite expectations that the Federal Reserve will cut rates this year, yields on 10-year Treasury bonds have started climbing again, with the result that all corporate debt that draws on 10-year Treasuries as their main benchmark are experiencing higher debt costs. This leaves chief financial officers and treasury managers with a real dilemma, and many are starting to look seriously at how to refinance the large wall of debt that falls due over the next couple of years.
No one is under any illusion that the amount that needs to roll over is vast. With interest rates so depressed for much of the 2010s, taking on extra debt in preference to equity was a reasonable corporate action. However, with higher real yields and a widening spread over the benchmark debt indices, the true cost of refinancing may already be closer to 10 per cent when fees and administration costs are considered, or three times the rate a couple of years ago, according to Bloomberg data.