Everybody has a maturity wall, it’s just a matter of how far out it is.

That’s a familiar refrain, and speaks directly to one of the most important questions facing management teams who were able to lock in low rates during the Fed-facilitated corporate borrowing binge in 2020 and 2021: How long is “longer”?

By now, the Fed has a lot of begrudging buy-in for the “higher-for-longer” narrative, even as I’m personally inclined to fade it (consensus is a contrarian indicator, and so is Fed rhetoric). Assuming the Fed does manage to keep rates materially higher versus pre-pandemic levels (admittedly a low bar), corporate America will eventually have to face the music.

Borrow costs for the S&P rose the most YoY in decades during Q2, according to Goldman, but America’s largest corporations are still quite insulated compared to their small-cap counterparts. For smaller firms, the day of reckoning is nigh.

As the figure above from SocGen’s Andrew Lapthorne shows, small-caps have a very steep maturity wall.

“Re-financing risk is going to be a major topic over the coming years as governments, corporates and individuals face the consequences of a considerably higher cost of money,” Lapthorne wrote, in his latest. “Those with floating-rate instruments are already feeling the pain, but as more fixed-rate debt starts to roll over, we would expect a negative feedback loop to develop.”

As a reminder (and I’m recycling some of my own copy here), the implications of higher-for-longer rates are multiplicative. Higher borrow costs will crimp margins all else equal, and they’ll also make companies reluctant to take on leverage. Over the past half-century, the combination of falling interest expense and greater leverage contributed quite a lot to the overall increase in S&P 500 return on equity.

For small-caps, this is a “here and now” problem. Many smaller firms, Lapthorne went on, are “choosing to reduce duration or go floating rather than lock in higher rates for the longer-term.” The problem, he dryly noted, is that such a strategy “assumes that today’s rate environment is temporary, which is why markets become alarmed when there is economic data to the contrary.”