Corporate debt squeeze hits weak US borrowers before reset

Corporate debt costs for the weakest US borrowers hit 17%, forcing companies to revisit refinancing plans as Treasury yields climb.

The 17% borrowing cost for the lowest-rated companies was the highest since May 2020, according to the market figures cited by analysts. The risk premium on debt rated triple-C or lower has widened to 12 percentage points, the largest gap since 2022.

Treasury yields reset debt plans

Analysts said companies with floating-rate loans and borrowers facing near-term maturities are most exposed after the 10-year Treasury yield reached its highest level since 2002 last week. Higher government yields have lifted the base rate for corporate borrowing, while lenders are also asking for more return to hold weaker credits.

James Reilly, senior markets economist at Capital Economics, said investors are seeking more pay for credit exposure. "Investors are increasingly demanding more compensation for taking on the corporate credit risk," Reilly said.

The change is already altering issuance plans. Bank of America cut its estimate for dollar-denominated investment-grade bond sales this month to $110 billion from about $160 billion, a reduction of roughly $50 billion from its earlier view.

Paramount deal shows duration caution

Paramount Skydance's financing showed how buyer preferences are shifting. The media group sold $52 billion of debt last week to help fund its $110 billion acquisition of Warner Bros Discovery, according to people familiar with the matter.

Demand for Paramount's two-year bonds was almost twice the appetite for 30-year bonds, the people said, as investors showed less interest in longer maturities exposed to future rate moves. Investors received more long-dated debt than some expected, and the bonds fell after trading began.

James Carter, co-head of fixed income at W1M, said some issuers are meeting a more selective market. "At the margin, we are seeing some deals pulled or delayed as investors become more selective. The weak performance of Paramount Skydance’s second-lien bonds, with the 2036s down several points from issue, is a sign of this," Carter said.

McCormick weighs financing mix

Many companies are favoring shorter maturities to preserve the option of refinancing later if rates fall. Erin Brown, co-head of global capital markets Americas at BNP Paribas, said issuers do not want to commit to high financing costs for too long, adding that market access now needs more planning.

McCormick told investors last week it was reviewing currencies, maturity length and the split between fixed-rate and floating-rate debt for financing tied to its planned merger with Unilever's foods business. Marcos Gabriel, McCormick's chief financial officer, said on the company's earnings call that borrowing costs were central to investor discussions.

The stress is not evenly spread. Some investment-grade borrowers funding AI-related projects have continued to issue debt, with data-center investment plans outweighing the extra percentage point or two in borrowing costs, according to analysts cited in the market account.

Refinancing wall tests borrowers

The next pressure point is the debt maturity schedule. Moody's estimated last year that a record $1.45 trillion of US investment-grade corporate debt would mature between 2026 and 2030, creating a refinancing test for companies that borrowed when rates were near early-2020s lows.

Michael Zdinak, head of the US consumer markets service at S&P Global, said a prolonged period of elevated rates would pressure corporate plans. If borrowing costs stay high through 2027 and 2028, he said, companies could defer investments, acquisitions, buybacks and expansion plans when expected returns do not justify the financing cost.

If Treasury yields hold near current levels, the global macro effect would be tighter financial conditions, with weaker US borrowers cutting spending first and stronger issuers paying more to extend maturities. For Paramount Skydance and McCormick, that path would keep attention on duration, currency mix and floating-rate exposure; for the wider credit market, it would favor shorter issuance and higher premiums for lower ratings.

If yields instead ease before the 2026-2030 maturity wave peaks, refinancing risk would decline first for investment-grade borrowers and later for the lowest-rated companies. Moody's chief credit officer Atsi Sheth said the key credit risk is whether profitability keeps pace with borrowing costs; if it does not, defaults and delayed capital spending become the industry channel to watch.