Fed rate hike will cause ‘modest corporate discomfort’ – Fitch

Fitch Ratings has said a gradual hike in the United States’ base interest rate would likely result in lower profits and slower growth, due to increased borrowing costs for US companies.

Fed rate hike will cause ‘modest corporate discomfort’ – Fitch

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The ratings agency added however that this would only have ‘limited impact’ for corporate credits as a whole, given the backdrop of US economic growth and the ‘aggressive refinancing’ many companies have undertaken to push maturities out with lower coupons.

Should the Fed depart from its plan to raise rates slowly in favour of a steeper path US corporates could come under rating downgrade pressure, Fitch said.

The hit to the credit metrics of US corporations in such a scenario would likely to ‘dampen’ equity values as well, Fitch said.

The ability to handle interest rate increases varies across sector, Fitch explained. Sectors with ‘cost recovery mechanisms’ such as utilities, or strong pricing power like aerospace, defense, engineering and construction) are better best able to counter the squeeze a faster rate rise process would create, it noted.

Sectors where ongoing access to credit is critical for growth such as REITs are likely to be ‘especially sensitive’ to a faster rate hike due to high distributions and limited ability to retain cash.

 

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