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US Corporations Dodge Interest Rate Hikes: A Financial Paradox

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Olalekan Adigun
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US Corporations Dodge Interest Rate Hikes: A Financial Paradox

When the Federal Reserve announced an increase in interest rates, many predicted it would curb consumer spending and impact corporate profits. However, in a surprising twist of events, large corporations in the United States have experienced a decrease in net interest payments, reaching lows unseen since the 1980s. Despite the predicted negatives of the Fed's interest rate hikes, these major companies have found ways to circumvent their impact, leading to an unexpected outcome.

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Securing Low-Cost Financing and Shifting Surplus Cash

Two primary factors have contributed to this trend. Large corporations, in anticipation of the rate increases, secured low-cost financing. Furthermore, as the rates rose, these companies shifted their surplus cash into higher-yielding investments. The result? Net interest payments, which account for interest income subtracted from the money owed on debt, plummeted to $136.8 billion by the end of September.

The Potential Risk for Smaller Businesses and Riskier Borrowers

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This advantageous situation may not be sustainable, particularly for smaller businesses and riskier borrowers. These entities are already grappling with rising costs. While large corporations have managed to dodge increased borrowing expenses, they could face higher costs in the upcoming years. A significant chunk of corporate debt is due to mature and will necessitate refinancing at potentially higher rates.

Threat to 'Zombie' Companies

The risk is especially high for so-called 'zombie' companies. These organizations are already on thin ice, struggling to cover their interest payments with earnings. If rates persist at their elevated levels, these companies could be pushed into insolvency. This potential development could impact growth and employment, casting a long shadow over the economy.

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