As Borrowing Costs Rise, Beware Of These Debt-Laden Stocks In Your Portfolio

Investors should steer clear of businesses with high levels of debt on the balance sheets as borrowing costs increase, Evercore ISI advised in a note published on Sunday.

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Since the Federal Reserve started increasing mortgage rates a year ago in an effort to control inflation, borrowing costs have been rising. But, earlier this month, the bank crisis struck, raising worries about a further reduction in lending by the sector. Fewer loans could be made by banks in order to increase capital.

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During the central bank's meeting last week, Fed Chair Jerome Powell stated at a news conference that "events in the financial system over the past two weeks are expected to result in tighter lending conditions for families and companies, which would, in turn, affect economic results."

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These stricter guidelines also raise the cost of borrowing. According to Powell, the bank crisis caused a further quarter-point rate hike. As a result, companies with significant debt loads and a history of cheap financing costs are now exposed to refinancing concerns, according to Evercore ISI economist Julian Emanuel.

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"Debt Exposed" enterprises are probably going to experience further stress," he stated. "Banks are still pressured; credit is stressed.

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Listed below are a few companies that Evercore ISI warned could suffer from a significant change in borrowing & business conditions. The company looked for businesses with a market capitalization of over $2 billion and short-term debt that makes up more than 10% of overall debt. If the business still requires funding, short-term debt will need to be refinanced.

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Finally, their 2023 estimated income before interest, taxes, depreciation, and amortization is not anticipated to cover interest costs or their brief debt is more than 10% of their 2023 estimated EBITDA, according to Evercore ISI. The names are also heavily indebted, with net debt-to-equity ratios inside the top decile (80% and higher).

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• Carvana

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• Duke Energy

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• Ford Motor

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• Opendoor Technology

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• Petco Health & Wellness

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• Walgreens Boots Alliance

When people used to browse for automobiles online and there weren't as many new cars available, online used-car vendor Carvana was a Covid-pandemic favorite. Since then, the stock has plummeted, losing about 98% in 2022 as the business suffered. 20.4% of Carvana's total debt is short-term, and the company has a net debt-to-equity ratio of 503.6%.

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The business revealed plans to refinance some of its $9 billion debt load last week. Carvana is giving noteholders the choice to trade in their unsecured notes for new secured obligations at a premium to the market price. In a filing with the Securities and Exchange Commission on Wednesday, Carvana stated that would give holders of the notes "collateral while decreasing Carvana's cash accrued interest and maintaining significant flexibility."

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According to Evercore ISI, Duke Energy's net debt to equity is 107.3%, and its short-term debt represents 10.9% of its overall debt.

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Duke Energy's CEO Lynn Good told Trade Algo that the company had been closely monitoring the rise in interest rates.

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Because of our high level of borrowing, she stated in an interview with "Squawk Box," "rising interest rates are a big worry."

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According to her, Duke intends to invest $65 billion over the following five years in its switch to sustainable energy.

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Good continued, "That just means we need to look for methods to take expenses out of our business." He noted that the company discovered $300 million in savings for 2023 through improving corporate operations efficiency.

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Finally, Walgreens Boots Alliance has a net debt-to-equity ratio of 115.2% and a short-term debt ratio of 17.1% of its total debt.

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The pharmacy chain recently acquired Summit Health as part of its increased investment in healthcare. Also, it is in the process of buying out CareCentrix, an at-home care provider, and Shields Health Solutions, a specialized pharmacy.