Moody's: Rising interest rates pose credit risk to weakest US companies

US companies with good credit quality will be able to afford the 0.25% increase in short-term interest rates announced by the US Federal Reserve, but credit risk will increase for some weaker companies because refinance risk will rise for them as interest rates edge higher and the debt market becomes increasingly risk averse, says Moody's Investors Service. 

Credit suppliers could either decline to extend credit to companies with weak business fundamentals and aggressive capital structures, or only offer such companies credit at prohibitive prices. 

"The companies facing the most challenging credit conditions are mostly in the oil and gas industry and in the services sector," said Bill Wolfe, a 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." 

The interest rate increase will not affect most US companies until 2017-18 when they begin to refinance a significant balance of debt maturities coming due in 2019-20, according to the report "Non-Financial Corporations -- US: Rising US Interest Rates Challenge Companies With Lowest Credit Quality." 

Moody's notes that when the first wave of refinancing begins, interest rates will still likely hover near historic lows. As a result, credit should remain affordable for most US companies and give them time to bolster their credit profiles by increasing cash flow. 

While some speculative-grade companies will be vulnerable to higher interest rates and increased investor selectivity, Moody's believes that the vulnerabilities are relatively contained. 

"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."