Barclays has identified the European stocks that are most at risk of taking a hit to profits over rising interest payments for debt over the next two years. During the coronavirus pandemic, central banks cut interest rates to historic lows, enabling companies to borrow debt at very favorable rates. Many firms took advantage of low rates to push out maturities of their bonds to lower interest expenses and strengthen balance sheets. However, refinancing has now become far more difficult as rates have surged and are expected to stay elevated through 2025. Barclays believes the challenges will be compounded due to the large number of companies and the volume of debt that will need to be refinanced at the same time in 2024 and 2025. The Wall Street bank said that industries like real estate, communications, healthcare and utilities may see profit margins squeezed by 30-50 basis points through 2025 due to refinancing at higher rates. This could dent earnings per share by 3% to 5% over two years, the analysts said. The table below shows the 10 stocks Barclays expects to have the biggest increase in interest costs through to 2025. These companies also had worse-than-average debt loads relative to their sector, according to the bank. Barclays performed the analysis by mapping outstanding corporate bonds due to maturity over the next few years to underlying stocks. It then examined factors like total debt at the company and their ability to absorb higher interest costs. The list includes Swedish property developers Fastighets Balder and Castellum, German real-estate owner Vonovia , Premier Inn hotel chain owner Whitbread, retailer H & M , Swiss-headquartered recruitment agency Adecco , German chemicals giant BASF and French defence contractor Dassault Systemes . Barclays warned that “the stand-out sector” is real estate. Interest expenses for these companies could quadruple from 1% of sales to 4% by 2025. Since interest costs are integral to real estate business models, the impact on margins and profits could be much more severe, the bank’s analysts said. However, the bank believes most companies seem well-positioned thanks to strong balance sheets, while only some sectors face more significant challenges. “Corporate bond yields at a multi-decade high have raised concerns that credit strains are putting financial markets in danger once more. But, at the risk of looking foolish, we are willing to utter the most dangerous words in investing: this time is different,” wrote Barclays strategists led by Matthew Joyce and Zoso Davies in a note to clients on Nov. 14. The Barclays team is confident that while interest rates can hurt company bottom lines, there was “scant” evidence that showed there was systemic risk.
