London Calling: Borrowers Feeling the LIBOR Pinch

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.
 
3-Month LIBOR (USD)
3-Month-LIBOR
Source: Bloomberg L.P., 10/30/2009 to 10/31/2016
Past performance does not guarantee future results.
 
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.
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Author

Heartland Advisors Value Investing Portfolio Manager Bradford A. Evans

Bradford A. Evans

Evans, CFA, is Senior Vice President and Portfolio Manager of the Value Plus Fund and its corresponding separately managed account strategy. He has 21 years of industry experience, 18 at Heartland.

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