With short-term interest rates at historically low levels, many small cap companies are funding all their capital needs with short-term debt.
Can you blame them? Small cap companies are borrowing at 2 to 3% floating rates or a bit more if swapped to fixed rates.
Yes, it is a short maturity, one to three years, but the lenders will extend it when due. They said they would.
Yes, we all know that old maxim, fund long-term assets with long-term capital but companies are saving so much in interest by borrowing short-term.
What’s the risk, anyway? If rates start to rise, companies can refinance with long-term capital then.
I hear this a lot. It worries me.
Interest rates may rise unexpectedly and fast. When the time comes to lock in long-term capital, there’ll likely be a rush to refinance.
First, who lends for 5 to 10 years – insurance companies, specialty lenders, the public bond market?
There are limits to how much and how fast these markets can absorb new debt.
Second, what will happen to interest rates? Spreads on corporate debt have already widened since this summer. What do you think will happen to interest rates when there’s a rush to refinance?
I’ve been encouraging small cap companies to be prudent, to borrow some capital long-term. Create a relationship with the long-term debt market now, before the rush.
In the rush to refinance, you’ll want your company to be the first in line because your company is already a known participant in the long-term debt market.
Now, that’s a smart move.
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