Economy 5 min read By Bethany Hadley
Midterm results will not ease borrowing costs for US companies
Economists and lenders at EY-Parthenon and Boston University say US corporate borrowing costs are likely to stay high and volatile into 2027, regardless of which party controls Congress, and advise CFOs to stress-test investments and diversify funding.
US companies should expect borrowing costs to stay high into 2027, whichever party controls Congress after the midterm elections, according to finance specialists advising corporate chief financial officers. Josh Putnam, global and Americas corporate finance leader at EY-Parthenon, said that growing deficits, strong capital demand, inflation volatility and policy uncertainty are putting sustained pressure on long-term rates.
With Democrats winning control of both chambers of Congress, companies could face greater scrutiny over issues such as artificial intelligence investment and data centre development. Putnam argued, however, that the wider financing challenges facing finance chiefs extend well beyond the shifting political landscape. He said that financing conditions are likely to remain volatile regardless of the outcome, which makes disciplined capital allocation, debt management and investment decisions increasingly important.
Putnam recommends that CFOs stress-test investment hurdles, evaluate debt maturities and protect balance-sheet flexibility. Companies, he said, must understand which investments can generate returns above their cost of capital and redirect resources when they cannot. « Companies that demonstrate they can put capital to work effectively will be best positioned to pursue growth, » he said.
Gregory Daco, EY-Parthenon's chief economist, said that political gridlock could add risk but would not, on its own, necessarily raise long-term borrowing costs. A divided government « would not automatically push term premiums higher, » he said. Repeated budget disagreements, shutdown risks, debt ceiling stress and greater fiscal uncertainty, however, « would reinforce upward pressure, » he added. Daco advises testing investments against a range of financing costs and keeping hurdle rates that reflect a structurally higher and more volatile cost of capital.
For companies, the risks extend beyond long-term interest rates. Political uncertainty can also affect access to credit and the cost of short-term financing. Mark Williams, a master lecturer in finance at Boston University's Questrom School of Business and a former bank examiner for the Federal Reserve Bank, said that « markets respond to uncertainty by charging more, whether the risk originates in Washington, D.C., or on Wall Street. »
Williams said banks react to elevated risk by tightening credit terms and reducing lending. « Legislative gridlock can create volatile funding cycles and cause short-term borrowing costs to spike, » he explained. Companies that rely on commercial paper, a form of short-term corporate borrowing, should consider longer-term funding, diversify their financing sources and secure credit lines across multiple banks, he said.
Williams also warned that a divided government can increase the risk of shutdowns, which can delay the release of economic data. CFOs should therefore develop internal models to fill those gaps, he said. Government contractors should evaluate how potential payment delays could affect their cash flow.
Artificial intelligence investment could face particularly close financial scrutiny as financing costs rise and regulatory uncertainty grows. Voters on election day sent a clear message about the AI buildout, Fortune reported: the cost of data centres has become a political issue. Candidates in both parties who campaigned on rising electricity bills won key races, and at least 14 Ohio towns passed restrictions on data centre development.
Williams said these results underline the regulatory and political uncertainty facing AI and data centre developers, which could drive up costs and complicate project financing. Private credit funds, the main lenders in the sector, would demand higher interest rates, he said, and prices on outstanding AI bonds could fall as yields rise. He noted that the market was already recalibrating AI risk before the election. He recommends a return to corporate finance fundamentals, including more conservative net present value assumptions, multi-variable scenario analysis and stress testing against higher borrowing costs and stricter lending covenants.
Daco sees a political dimension as well. With affordability central to the election, « a backlash is likely if households see AI investment raising power costs while its benefits remain concentrated, » he said. He advised CFOs to prioritise projects with measurable productivity gains, account fully for power and infrastructure costs, and pair technology investment with investment in workers and skills.
Source: fortune.com
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