As the 0.25 percent increase in short-term interest rates announced by the US Federal Reserve looms, the ramifications of the hike continue to be a topic of speculation. Moody's Investor Service has predicted that credit risk will increase for some weaker companies, due to refinance risk rising as the debt market becomes increasingly risk averse. Credit suppliers seem positioned to decline credit extensions or offer them at prohibitively higher rates to companies boasting "weak business fundamentals and aggressive capital structures."
"This will continue to mostly affect the weakest companies in the weakest sectors, which will be the most vulnerable as market sentiment becomes more cautious."
"The companies facing the most challenging credit conditions are mostly in the oil and gas industry and in the services sector," said Bill Wolfe, Moody's Senior Vice President. "The collapse in oil prices has significantly weakened the credit metrics of oil and gas companies, and the high level of debt-financed merger and acquisition activity has similarly weakened the credit profiles of some companies in the services sector. Given very weak fundamentals, companies in the metals and mining sector are also likely to be pressured."
In interest rate hike seems unlikely to start impacting most companies until 2017-2018 when debt maturities coming due in 2019-2020 will send many in search of refinancing. This first wave of refinancing seems likely to still benefit from historically low rates, but investor selectivity will soon make the market more hostile towards companies on weaker financial footing.
"Investors will become more risk-averse as interest rates rise," said Wolfe. "Credit spreads began widening in anticipation of the interest rate hike, but this will continue to mostly affect the weakest companies in the weakest sectors, which will be the most vulnerable as market sentiment becomes more cautious."
Even with this prediction, the credit risk and vulnerabilities are likely to be contained to speculative-grade companies, leaving stronger companies still able to grow in spite of investor selectivity.