The Bank of Canada has been keeping busy in 2024. Having cut interest rates twice already, it’s expected to make another important rate decision in September. When interest rates go down, the values of stocks should theoretically go up. It doesn’t always work out that way — sometimes stocks are priced in advance, assuming future interest rate moves, which results in an actual interest rate cut having less of an effect than you’d imagine. Nevertheless, some companies are so rate-sensitive that they do respond to interest rate moves directly. In this article, I will explore one such stock that could be a buy if the Bank of Canada keeps cutting rates.
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Brookfield
Brookfield (TSX: BN) is exactly the type of stock that would gain if interest rates keep falling. The company has a very heavy amount of debt — about $335 billion worth, to be precise. Only a small $14 billion chunk of that is held at the corporate level — the rest is either property-specific or held at partially owned subsidiaries. The way Brookfield manages its debt helps avoid truly catastrophic defaults. However, the interest expense brought on by a high debt load is a real cost, no matter how well spread out the entity’s debt is. Therefore, we would expect Brookfield’s profit to rise if interest rates keep coming down.
Now technically, Brookfield’s debt is mostly U.S. dollar debt issued in the United States. It’s really the Federal Reserve’s interest rate that matters here. However, Brookfield does have some Canadian dollar debt. For example, it has a $435 million Canadian dollar secured bond due in 2035. That bond is fixed rate, but if rates come down, then it can be refinanced for lower interest. The bond has a fairly high 5.9% coupon, so that fact is a fortuitous one for Brookfield’s profitability.
Another rate cut likely
Since we’re talking about rate cuts and their impact on Brookfield’s profits, we should take a moment to think about how likely another cut actually is.
The consensus generally is that we’re likely to see at least one more rate cut this year. Tiff Macklem basically said in advance that he was open to doing more cuts, and the 2.5% inflation rate is pretty close to the target (2%). So, it would be reasonable to assume that the Bank of Canada will cut rates at least once more this year.
Defaults
Another reason why a rate cut would be good for Brookfield is because it could improve Brookfield Property Partners’s (TSX: BPY.UN) credit score. BPY is a partially owned Brookfield subsidiary that defaulted on several property-specific debts last year. As a result, DBRS Morningstar downgraded the company’s credit rating to BBB. Such a poor credit rating will likely make it harder for BPY to raise money and close deals. However, if interest rates come down, then the company will be better able to service its debt. That would result in a lower cost of capital, fewer defaults, and potentially a rating upgrade. That would immensely benefit Brookfield Property Partners, and some of the benefits would flow through to Brookfield Corp.
Foolish takeaway
It’s hard to think of a company that would gain more from rate cuts than Brookfield. With a whopping $335 billion in debt, this company is highly leveraged. If rates come down, we’d certainly expect this stock to respond positively.
