With the cost of borrowing rising, investors should avoid companies with a lot of debt on their balance sheets, Evercore ISI warned in a note Sunday. Borrowing costs have been rising since the Federal Reserve began raising interest rates last year in an effort to tame inflation. Then, the banking crisis hit earlier this month, raising concerns about a further tightening of lending by the industry. In order to create capital, banks can make less loans. “Events in the banking system over the past two weeks are likely to lead to a tightening of credit conditions for households and businesses, which in turn will affect economic results,” Fed Chairman Jerome Powell said at a press conference following last week’s central bank meeting. These tighter conditions also make lending more expensive. Powell said the banking crisis had the equivalent of an additional quarter-point rate hike. This leaves high-debt companies, accustomed to lower financing costs, with the risk of refinancing, said Julien Emmanuel, an analyst at Evercore ISI. “Banks remain stressed, credit is strained, and companies that are in debt are likely to feel more pressure,” he wrote. The following are some of the names that Evercore ISI said could be hit by a material change in its borrowing and business terms. The firm examined companies with a market cap of more than $2 billion, and short-term debt that accounted for more than 10% of their total debt. Short-term debt must be refinanced if the company still needs capital. The names are also highly leveraged, with net debt-to-equity in the top ten (80% and above), according to Evercore ISI. Finally, their 2023 estimated EBITDA is not expected to cover interest expense or their short-term debt is more than 10% of their estimated 2023 EBITDA. Online used car dealer Carvana was once the darling of a disease The COVID-19 pandemic, as consumers have been shopping for cars online, while the lack of new cars has driven up the used car market. The stock has fallen since then, losing nearly 98% in 2022, as the company has 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 offers note holders the option to exchange their unsecured notes at a premium to current trading rates for new, secured notes. This will provide note holders with “security while reducing Carvana’s cash interest expense and maintaining significant flexibility,” the company said in a statement Wednesday before 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 Lyn Good told CNBC that the company is paying close attention to rising interest rates. “Rising interest rates is a major issue because we have a lot of leverage,” she said in an interview with “Squawk Box”. She said Duke plans to spend $65 billion over the next five years on its transition to clean energy. “It just means that we need to look for ways to take costs out of our business,” Judd added, noting that the company was able to generate savings of $300 million for 2023 by increasing the efficiency of its corporate operations. Finally, Walgreens Boots Alliance’s short-term debt ratio is at 17.1% of its total debt and its net debt-to-equity is at 115.2%. The pharmacy chain has been ramping up its healthcare strategy, recently acquiring Summit Health. It is also in the process of acquiring full ownership of home care company CareCentrix, as well as specialty pharmacies Shields Health Solutions. — CNBC’s Michael Blum and Michael Wayland contributed to this report.
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