Why are "cheap money" companies practically unbeatable?

Nick Vosniakos | Νίκος Βοσνιάκος
Sep 28
10 min read

Competitive advantage in times of high interest rates

The recent sharp shift in global monetary policy has created an unprecedented divide in the business market. Over the past decade, companies have had the rare opportunity to borrow at extremely low interest rates. Before 2020, the "cheap money" environment favored companies that chose to refinance their loans or increase their debt on particularly favorable terms. Those forward-thinking companies that, during the period of historically low interest rates before 2020, proceeded to refinance their debt, restructure their capital structure, or secure long-term loans, "locked in" cheap debt and gained a huge, powerful, and sustainable competitive advantage. After 2020, interest rates skyrocketed, making borrowing much more expensive. Thus, companies that did not take advantage of the low interest rates – or worse, are now seeking new loans – face higher costs and more difficult debt servicing.

The era of cheap money (before 2020)

For a long time after the global financial crisis, interest rates remained at historically low levels. The period 2015-2020 was characterised by an excessively "cheap money" policy by central banks. Central banks adopted easing policies, creating abundant liquidity and "cheap money". This environment, allowed companies to borrow at low cost and increase their leverage, taking full advantage of low financing costs for an extended period. During the period 2010–2021, many companies issued low-interest bonds and loans to finance investments, acquisitions, dividends, or share buybacks. In simple terms, cheap money provided the incentive and opportunity to refinance existing debt on more favorable terms. Many companies also proceeded with debt restructuring, i.e. renegotiating the terms of their debt – in some cases even with a "haircut" or extension of the repayment period – especially if they were facing repayment difficulties.

These moves resulted in an improvement in the capital structure of many companies. During the period of low interest rates, debt was significantly cheaper than equity, so many companies deliberately increased their borrowing—but at consistently low interest rates. In this way, they "locked in" a consistently low cost of financing for many years.

The sharp rise of interest rates after 2020

The picture changed dramatically after 2020. Inflationary pressures following the pandemic prompted central banks to aggressively raise interest rates. The European Central Bank (ECB) and the US Federal Reserve (Fed) began a cycle of interest rate hikes to combat inflation. For example, the ECB implemented continuous interest rate hikes in 2022–2023, leading to a sharp increase in the cost of financing in international capital markets. Within about 18 months, the base lending rate rose from close to zero to levels not seen in over a decade, with average interest rates on new business loans reaching 4%. In the US, the Federal Reserve (Fed) raised the Fed Funds rate from ~0% in early 2022 to over 5% in 2023. This meant that new borrowing became much more expensive for everyone, and lending rates for businesses in the Eurozone rose significantly. This dramatic change highlights the advantage gained by companies that borrowed in time, before the rise in the cost of capital.

The problem is becoming more acute as much of the corporate debt issued over the past decade begins to mature. As they will have to roll over these loans, they will do so at today's high interest rates – which translates into a sharp increase in servicing costs for these companies. As analysts point out, the need to refinance old "cheap" debt with new, more expensive debt is eating into companies' profit margins and, in extreme cases, may even threaten their viability. The seemingly "unbeatable" position of companies with cheap debt is not entirely permanent. For many of them, the advantage is temporary and will be severely tested when the time comes to refinance. This creates a critical risk known as the "maturity wall". Huge amounts of corporate debt, issued during the period of low interest rates, are set to mature in the coming years. The refinancing of this debt will take place in an environment where borrowing costs are significantly higher than they were when the original bonds were issued. Analyses show that more than half of the maturing bonds will face an interest rate increase of more than 1 percentage point, while about 25% will see an increase of more than 2 percentage points.

Competitive advantage for those who secured cheap debt and points of superiority

This highlights a significant gap between businesses. Those that had the foresight (or luck) to restructure their debts and lock in low interest rates before the rise now have a clear advantage. Their monthly or annual interest charges remain low because the cost had stabilized at low levels. In contrast, their competitors, who are now paying higher interest rates, see a large part of their revenue going to interest payments. This advantage is multidimensional and can be summarized in two main points:

1) Cost Advantage (Cost Leadership)

Companies that have secured cheap debt enjoy a strong cost advantage over their competitors. Lower interest expenses directly reduce a company's operating costs, leading to higher net profits and, consequently, higher profit margins. This increased profitability can be used to repay debt before it matures, finance new projects, or even return capital to shareholders.

In addition, the cost advantage provides strategic flexibility in pricing and the ability to offer competitive prices. A company with low debt costs can keep the prices of its products or services lower than competitors facing higher financing costs. Because "lucky" companies are not burdened by interest payments, they can, if necessary, reduce the prices of their products or services, putting pressure on competitors who do not have the same flexibility. In other words, they have room to absorb costs or offer discounts without incurring losses, something that their more indebted competitors find difficult to do. This can lead to market share being lost and the creation of an insurmountable barrier to entry for new players.

Finally, the fixed and low cost of long-term debt acts as a natural hedge against inflation. While a company's revenues may increase due to inflation, interest payments remain stable, thereby improving its overall financial position and shielding its profitability. Many companies have used borrowing to finance the repurchase of their own shares, thereby boosting earnings per share and share price, to the benefit of shareholders and management.

2) Advantage of Strategic Flexibility

Beyond the cost advantage, companies with cheap debt enjoy significant strategic flexibility. Businesses with low-interest debt free up cash that would otherwise go to interest payments and can reinvest them. They can finance aggressive growth strategies, such as expanding into new markets or investing in research and development, without being burdened by high capital costs. This gives them the leeway to innovate and adapt more quickly to market changes.

Research shows that without the "artificial support" of cheap money, weaker companies would be forced to underinvest in research and development or capital expenditures and might even cut dividends to meet interest costs. In contrast, stronger companies would leverage their financial strength to increase their market share. The credit gap theory argues that companies that are less constrained by credit conditions tend to invest more, and this period presented such an opportunity. Now that interest rates have normalized, we are seeing this dynamic: strong players are accelerating their growth and widening their profit margins relative to weaker ones, with the performance gap between the two widening.

Furthermore, their healthy capital structure and low debt costs make them more attractive to investors and creditors. Improved creditworthiness ensures easier access to new capital in the future, should it be needed, and on more favorable terms. This financing capacity, unlike competitors who are forced to turn to more expensive sources, strengthens their investment credibility and provides them with an additional weapon in the battle for market leadership.

Finally, cheap debt acted as a catalyst for the boom in mergers and acquisitions, particularly leveraged buyouts. This strategy allowed companies to rapidly expand their market share, acquire technology, and secure market leadership in a way that would have been unprofitable in a higher interest rate environment.

In summary, companies that "shielded" their balance sheets during the period of low interest rates now appear almost invincible. Their competitive advantage is not theoretical—it is reflected in hard economic figures: higher profits, stronger cash flows, flexibility in pricing strategies, and greater resilience to crises. This confirms an old lesson in corporate finance: when borrowing costs are low, those who exploit them wisely lay the foundations for their future superiority.

Impact on the market and sectors

This phenomenon is not limited to a single category of businesses – it affects all sectors of the economy, albeit to varying degrees. In general, all businesses (small or large, in any sector) that managed to secure cheap, fixed-rate debt before interest rates rose are winners. On the other hand, those that now need new financing or have a large portion of their debt at floating rates are under pressure.

Let's look at some specific cases:

Capital-intensive sectors: In sectors such as energy, infrastructure, telecommunications, and construction, companies traditionally have high levels of debt (due to large investment needs in capital equipment). Companies in these sectors that refinanced their loans in 2018–2021 are now benefiting, as they continue to pay low interest rates. In contrast, their competitors who are allowing large loan obligations to mature now face a sharp increase in financing costs and therefore lower profit margins.
Real Estate: The real estate sector (commercial and residential) is deeply affected by interest rates. In commercial/professional property, for example, loans worth hundreds of billions are expected to mature in the next 12–18 months. Refinancing this debt at high interest rates is particularly difficult, which increases the risk of bankruptcies or property sales at low prices. Real estate companies that had locked in low interest rates on a large portion of their loans are now in an advantageous position: they can keep rents lower or withstand a period of reduced demand without being threatened by interest rates. On the other hand, those with floating-rate loans or loans maturing soon may be forced to raise prices, sell assets, or restructure debt in order to survive.
Highly leveraged companies: Companies with low credit ratings—often referred to as "zombie companies" when they survive marginally thanks to cheap loans—are perhaps the most vulnerable. Many of them prospered artificially during the era of cheap borrowing, but now that costs have risen sharply, they risk seeing their profits disappear and/or default on their payments. These are companies that cannot cover their interest expenses with their operating profits and survive only through continuous refinancing of their debt. The Bank for International Settlements noted that the proportion of such companies rose from 2% in the 1980s to 12% in 2016. For these companies, the high-interest rate environment is a deadly threat. Their inability to refinance their debt will lead to a wave of defaults, forced restructurings, and possibly bankruptcies. There has already been an increase in defaults among weaker companies, as bond maturities lead to refinancing on unaffordable terms.
Small and medium-sized enterprises: For SMEs, which usually do not have access to bond markets, the picture is mixed. Those that managed to borrow at a fixed low interest rate (e.g., through guarantee programs or fixed-rate bank loans) are now at an advantage. However, many smaller businesses rely on bank loans with floating interest rates. As Euribor and other interest rates have risen, they are seeing their monthly payments increase significantly. This limits their liquidity and often forces them to raise prices or postpone investments. The competitive landscape thus becomes uneven in favor of the few SMEs that managed to "lock in" cheap financing (e.g., through the Recovery Fund, which provided low-interest loans for investment projects).

Generally speaking, in the current "era of expensive money", markets are expected to see a redistribution of market share in favor of financially stronger companies. Concentration may intensify: companies with strong balance sheets can withstand the downturn or high costs and possibly acquire competitors that are buckling under the weight of expensive debt. Investors are already noticing that corporate results are diverging, the best companies are improving revenues and profits, while the weak ones are lagging behind. This could also lead to a widening of the valuation gap: strong stocks are rising, while weak ones are underperforming or sliding, reflecting risk. Simply put, the market now rewards foresight and financial health much more than it did during the zero-interest rate period.

Conclusions

Developments in recent years have highlighted how critical timing and corporate debt management are. Companies that took advantage of the period of historically low interest rates managed to fortify themselves financially, gaining a long-term advantage over their competitors. On the other hand, those who were indifferent or unable to take advantage at the time are now facing unbearable costs. Looking ahead, businesses and investors can learn from this experience: economic cycles will bring alternating periods of cheap and expensive money and proactively adapting to these changes is key to prosperity. Companies need to actively manage their debt, lock in opportunities when they arise, and maintain flexibility for difficult times.

Favored companies during low interest rates era become unbeatable

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