Ever so subtly, the high interest rates of the past year have started to separate the viable businesses from the ones sustained by cheap money. Expect 2023 to kick that process into high gear.

Interest rates started surging in late 2021 as the Federal Reserve began to acknowledge that inflation wasn’t “transitory,” but relatively few companies have had to deal with the consequences. Many of them met their near-term borrowing needs during the first two years of the Covid-19 pandemic, when rates were unusually low. Defaults and bankruptcies have begun to inch up since then, but only slowly and from extraordinarily low levels.

So far, prominent blowups have been few and far between. In June, the cosmetics giant Revlon Inc. — owned by billionaire Ron Perelman’s MacAndrews & Forbes — filed for bankruptcy amid struggles to keep pace with new brands. In August, drugmaker Endo International Plc initiated Chapter 11 proceedings, faced with lawsuits over its role in the US opioid epidemic. Then there were the crypto implosions, punctuated by the collapse of Sam Bankman-Fried’s FTX. Yet those episodes were idiosyncratic and, by total dollar amounts, still a far cry from the fallout of a typical recession.

But corporate America’s reckoning with its addiction to cheap debt is coming — and possibly as soon as next year. While high-yield bond maturities still look manageable for the next 12 months, the wall of expiring debt looks much more daunting in 2024. Companies will have to start refinancing well in advance of that, and they’re likely to find that the cost has risen too high for otherwise flimsy business models to withstand. At today’s rates, all-in yields on high-yield debt sit around 8.67% at the time of writing, far above the 2017-2021 average, according to Bloomberg data.

Much will depend on what transpires in the economy next year — and when. A Dec. 12-16 Bloomberg survey of economists puts the probability of a 2023 recession at 70%, but opinions vary widely in terms of when such a downturn would begin. UBS AG economists, for instance, project it will begin in April, while Bloomberg Economics forecasts it will start in September. For high-yield debt, the implication is that risk-free rates and credit spreads will pass like ships in the night at some point as the potential downturn comes into view, and the precise timing could matter tremendously for companies’ ability to pull off refinancing at palatable rates. As UBS strategists led by Matthew Mish noted in a report this month, spreads tend to tighten three to four months before the last Fed rate increase “and then gradually widen ahead of a recession.” In the words of the UBS strategists:

A key distinction is that this time, with our economists forecasting the Fed’s last hike in Q1 and an April recession, this window would be very compressed.

Credit spreads for junk bonds typically head toward 800 basis points over Treasury bonds in a typical recession, and at the current 452, they’re nowhere near discounting a genuine downturn. Even if inflation continues to ease and Treasury yields decline, junk-rated corporations may not find much of an opening to refinance inexpensively next year before credit spreads widen. As a result, many companies that got used to cheap money in recent years are probably going to have to settle for more sobering rates in 2023. Unfortunately, some of them won’t survive the process.

Jonathan Levin has worked as a Bloomberg journalist in Latin America and the U.S., covering finance, markets and M&A. Most recently, he has served as the company's Miami bureau chief. He is a CFA charterholder.