Refi Fire

Boom! Corporate America refinanced itself at a record pace in January. In renegotiating about $100 billion of loans from investors, companies saved themselves about $1 billion in annual interest costs.

Why? Quite simply, Treasuries have backed-up considerably in anticipation of large scale infrastructure spending by the new administration. So investors have been gobbling up floating rate paper in lieu of fixed, worried that inflation is around the corner. Loans linked to LIBOR fit the bill, so investors have been flooding the asset class. Fourth quarter inflows to loan mutual funds were the highest since early 2013. Corporate borrowers have said “thank you very much” to this flood of money, squeezing advantageous terms to the limit.

The paradox is that this massive provision of credit is self-fulfilling … for a time. Cash rich companies will take a longer time to default. And so investors are forced to play or else miss out and watch a pile of idle cash drag down their returns compared to more aggressive competitors.

But excess credit will inevitably find weak projects that cannot support the borrowing.

Nearly a quarter of the entire leveraged loan market has refinanced since the fall of 2016. Great news for Corporate America. Only time will tell how great it turns out to be for investors.