Rising interest rates have thrown much of the stock market into a frenzy. In particular, interest sensitive securities such as utilities and pipelines have seen valuations plummet, as investors seek elsewhere for better growth opportunities and long-term return on capital.
While utilities and pipelines (two groups which are over represented in the TSX) are certainly heavily tethered to interest rates, one key fundamental factor which often flies under the radar for investors is debt load.
With most large infrastructure related companies requiring massive debt loads to fund long-term projects, the fact that utilities or pipelines act as a proxy for bonds is only one of the key characteristics of why rising interest rates matter to these firms, on the whole.
The larger the debt load for any given firm, the higher the interest payments at the end of the day on that debt – while many companies may be looking to push out debt to longer maturities and refinance, the cost of doing so has just increased, putting pressure on such companies to produce results in the near term to placate investors.
At the end of the day, not every utility or pipeline company is the same, and I would encourage investors interested in picking up some (relatively cheap) names in these sectors to take a look at the respective debt loads of the firms first as a gauge for future performance, at least in the near to medium term.
Debt is never a good thing, but in a rising interest rate environment, I expect firms with larger than life debt loads to be punished more so. Invest accordingly.
Invest wisely, my friends.
