Interest Rate Sensitivity

Sensitivity. Take off your shoes. Hold hands. Everyone say, "Ommmmm." There we go.

So...think about a company teetering on the edge of bankruptcy with EBITDA or cash flow of $100 million and $1.2 billion of debt at average interest of 8%. So that's $96 million of debt service. Whoa. That's close. If cash flow goes down just 5%, the company won't make its payments. If its debt payments are adjustable or moveable, and rates go up even a tiny bit, the company is dead.

You can imagine how volatile the stock of this company would be, were it publicly traded. A cash flow multiple change of one turn would have enormous effect. So the company's stock then carries enormous interest rate sensitivity, and the phenomenon has the same vibe with companies in highly leveraged industries...like banks, many media companies, and other industries that typically sell their wares in a manner driven by loans: cars, homes, washing machines, etc. If rates go up a lot, those industries get...hurt.