"US Companies Face $183 Trillion Interest Burden"... Wall Street Halts Amid Recession Fears

US October M&A Performance Slows Down to the Lowest in 10 Years

(Photo by AP News)

[Asia Economy Reporter Yujin Cho] As the U.S. Federal Reserve (Fed) continues its aggressive interest rate hikes, Wall Street is slipping into a recession. Elevated interest rates and recession concerns have put the brakes on overall financial investment activities such as initial public offerings (IPO), borrowing, and mergers and acquisitions (M&A).

On the 6th (local time), The Wall Street Journal (WSJ) reported that although autumn is usually the busiest season of the year on Wall Street, this year is different, with stock trading, new loans, and corporate M&A performance all slowing down in recent weeks.

Earlier this month, the Fed implemented its fourth consecutive ‘giant step’ by raising the benchmark interest rate by 0.75 percentage points at once, pushing the upper limit of U.S. interest rates to 4.0%, the highest level since 2008. Fitch Ratings estimated that due to these rate hikes, U.S. companies will face an additional interest expense burden of at least $200 billion (approximately 282 trillion KRW) this year and next.

With high interest rates and persistent inflation, marginal companies lacking self-sustainability are expected to face increasing bankruptcies due to rising borrowing costs. Previously, even the Big Three U.S. automakers, including Ford, suffered setbacks by lowering their profit targets this year due to debt pressure from rate hikes.

As cash dries up in the market due to high interest rates, the IPO market is also in a slump. WSJ cited financial data provider Dealogic, reporting that the total public offering size of companies listed in the U.S. last month was $1.6 billion, a 95% decrease compared to the same period last year. This sharp decline in offering size is interpreted as companies preparing to go public postponing their listings due to the frozen market conditions.

The U.S. corporate M&A market, which enjoyed a record boom last year, is no different. Dealogic analyzed that the M&A volume in the U.S. during September and October totaled $219 billion, a 43% decrease compared to the same period last year. This is the slowest monthly performance in 11 years since 2011.

Wall Street has long identified the current inflation situation as the greatest risk that could derail the stock market. The prolonged tightening policy due to inflation and cost increases from rising prices are acting as causes for the slowdown in corporate profits and momentum.

Internet retailer Enjoy Technology succeeded in going public last October through a merger with a Special Purpose Acquisition Company (SPAC), but subsequently failed to raise funds and secure investors, filing for bankruptcy protection in June.

As the financial investment market freezes due to interest rate impacts, investors are turning their attention to safe assets instead of high-risk growth stocks. With increased preference for safe assets, the U.S. collateralized loan obligation (CLO) market has also shifted to a bearish trend, triggering warning signals for junk bond companies. Although CLOs grew by offering high returns during the low-interest-rate era, concerns over economic slowdown caused CLO issuance last month to drop about 70% compared to the same month last year, totaling $54 billion.

Warnings have emerged that if the CLO market’s bearish shift leads to a full-scale sell-off, marginal U.S. companies may face a wave of bankruptcies due to financing difficulties. Since CLOs have played a crucial role as a funding source for low-credit companies, a decrease in CLO demand could lead to increased borrowing costs for these companies. WSJ warned, "This market situation will push some companies to the brink of survival."

This content was produced with the assistance of AI translation services.