B2B Payments

Corporate Borrowers Stressed By Weak Dollar, Expensive Hedging

Corporate borrowers in the U.S. are facing new pressures thanks to expensive hedging costs and a weak dollar, according to Bloomberg reports on Friday (March 23).

Data from Bank of America showed a net selloff of U.S. corporate debt last week by foreign investors, the publication noted. Reports from UBS found foreign purchasing of U.S. corporate debt slumped at $38 billion in the fourth quarter of last year, the least since early 2016.

Hedging costs were found to be the highest they have been in nearly a decade. That, coupled with the weak dollar, means foreign investors are turning away from U.S. debt.

“The securities are on track for their worst quarter since 1994,” the publication wrote. “The weakness could translate to even higher borrowing costs for companies than they’ve already experienced in the last three months.”

Wells Fargo credit strategist Nathaniel Rosenbaum said the issues related to the weak dollar, increased hedge costs and dropping foreign investor demand are problems that are “here to stay for the remainder of the year.”

Reports also cited the Federal Reserve’s decision last week to increase interest rates – and to continue those increases in the coming years – as another factor that will raise borrowing costs and continue to heighten pressures on corporate borrowers. Tax reform, too, has reduced demand for corporate bonds, and shifting trade relationships in the U.S. are exposing corporates to greater risks.

“The negative returns are a signal to investors that maybe this is not such a great place to be,” said Eaton Vance money manager Kathleen Gaffney to the publication.

Bank of America, JPMorgan Chase and Wells Fargo have seen a 67 percent increase in bad corporate loans in recent years, according to analysts.

The latest reports suggest a reversal of a trend among investors racing to purchase U.S. corporate bonds. Reports in Financial Times last September found the sale of corporate bonds surpassed $1 trillion, its fastest pace ever, as corporates took advantage of lower interest rates at the time.

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