Strong credit fundamentals present opportunities

Corporate credit fundamentals remain strong, with stable leverage and cautious balance sheet use providing a solid foundation to absorb potential effects from rising capital costs, tariffs and inflation. 

The credit environment, while still limited by higher borrowing costs, continues to show strength and creates an opportunity for lenders with enough money to overcome tariffs, Winnie Cisar, global head of strategy at global credit research firm CreditSights, said during a June 3 Fitch Solutions webinar. 

“Interest coverage levels have come down, as we’ve seen rising borrowing costs, but we haven’t seen management teams proactively pushing leverage higher, using their balance sheet to do things like [leveraged buyouts] or return capital to shareholders in the form of dividends or share buybacks,” she said. “That starting point is really important from a fundamental perspective, that there is some room to absorb at least some of the tariff-related slowdown or inflation, or however it ultimately plays out, the cost of capital.”

Aggresive capital management

When it comes to managing that capital, there are two types of business owners in the market: those who are proactive and those who are “waiting and seeing,” National Business Capital Chief Executive Joe Camberato said during a June 6 town hall sponsored by National Business Capital. 

This cautious, wait and see mindset developed due to continued concerns of rising costs and slow receivables, he said. 

“From other business owners, they’re staying proactive, they’re locking in margins, they’re stacking liquidity, additional capital when they don’t need it, so they’re prepared for when they do need it, and they’re really aggressive with the expand.” Camberato said. 

The lenders and other businesses that have remained aggressive since the start of the pandemic have carved out a market share for themselves, Camberato said. 

“The folks that we watched wait and see since 2020 are slowly or rapidly starting to fall behind the others that have had a very aggressive mindset, have waded through the noise, have been growing through this and taking advantage of opportunities,” he said. “In this new world, you really have to think like a private equity group or like a hedge fund.  

“Even though you may own a restaurant or a medical office or a manufacturer construction company, you’re really like your own little private equity group.” 

Ag industry navigates costs 

Still, capital costs remain comparatively high in agricultural, which is playing a role in the fiscal conservatism of some farmers, Ryan Schaefer, vice president of New Holland North America, said during Ag Equipment Intelligence’s June 5 executive briefing webinar. 

“The cost of capital [is] really quite a bit higher than what producers of my generation are used to, so guys that started farming late ’90s, early 2000s have not seen interest rates of this level,” he said. 

Farm equipment lender AgDirect is advertising fixed rates between 6.25% and 7.65%, while variable rates run between 6.75% and 7.25%. BAC Community Bank is advertising equipment loan interest rates at 5.99% and up.