As the cost of borrowing rises, investors should avoid companies that have a lot of debt on their balance sheets, Evercore ISI warned in a note Sunday. Borrowing costs have been moving higher since the Federal Reserve began hiking interest rates last year in an effort to tame inflation. Then, the bank crisis hit earlier this month, prompting concerns about a further tightening in lending by the industry. In order to build up capital, banks could provide fewer loans. “Events in the banking system over the past two weeks are likely to result in tighter credit conditions for households and businesses, which would in turn affect economic outcomes,” Fed Chair Jerome Powell said in a news conference after the central bank’s meeting last week. Those tighter conditions also make lending more expensive. Powell said the bank crisis had the equivalent of an additional quarter-point rate hike. That leaves companies with high debt, accustomed to low financing costs, facing refinancing risks, Evercore ISI analyst Julian Emanuel said. “Banks remain stressed; credit has become stressed, ‘Debt Exposed’ companies are likely to feel further stress,” he wrote. Here are some of the names Evercore ISI said could be hurt by a material change in borrowing and business conditions. The firm screened for companies that have a market cap over $2 billion, and short-term debt that accounts for more than 10% of their total debt. Short-term debt will have to be refinanced if the company still needs the capital. The names are also highly leveraged, with net debt to equity in the top decile (80% and higher), according to Evercore ISI. Lastly, their 2023 estimated earnings before interest, taxes, depreciation and amortization is not expected to cover interest expenses or their short-term debt is more than 10% of their 2023 estimated EBITDA. Online used-car dealer Carvana was once a Covid-pandemic darling as consumers shopped for cars online, while the lack of new cars pushed the used car market higher. The stock has since sank, losing nearly 98% in 2022, as the company struggled. Carvana’s short-term debt is 20.4% of its total debt and its net debt to equity is 503.6%. Last week, the company announced plans to restructure some of its $9 billion debt load . Carvana is offering noteholders the option to exchange their unsecured notes at a premium to current trading prices in exchange for new secured notes. That will provide exchanging noteholders with “collateral while reducing Carvana’s cash interest expense and maintaining significant flexibility,” the company said in a filing Wednesday with the Securities and Exchange Commission. Meanwhile, Duke Energy ‘s short-term debt is 10.9% of its total debt and its net debt to equity is 107.3%, according to Evercore ISI. In February, Duke Energy CEO Lynn Good told CNBC the company has been paying close attention to rising interest rates. “Rising interest rates are a key issue because we are very leveraged,” she said in an interview with ” Squawk Box .” Duke plans to spend $65 billion over the next five years for its transition to clean energy, she said. “It just means we need to look for ways to drive costs out of our business,” Good added, pointing out that the company found $300 million in savings for 2023 by becoming more efficient in its corporate operations. Lastly, Walgreens Boots Alliance ‘s short-term debt is 17.1% of its total debt and its net debt to equity is 115.2%. The drugstore chain has been ramping up its health-care strategy , recently acquiring Summit Health. It is also in the process of acquiring full ownership of at-home-care company CareCentrix, as well as specialty pharmacy Shields Health Solutions. —CNBC’s Michael Bloom and Michael Wayland contributed reporting.
