March 13, 2017 / 1:54 PM / in 4 months

Fitch: Rising Rates Present Pockets of Risk for US Corporates

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(The following statement was released by the rating agency) CHICAGO/NEW YORK, March 13 (Fitch) Rising interest rates in 2017 and 2018 will not be a broad concern for US corporates in aggregate, but pockets of risk could challenge entities at the lower end of the rating spectrum, according to Fitch Ratings. With current LIBOR levels at or above most pricing floors - USD 3M LIBOR was 1.11% as of March 8 - subsequent rate hikes would expose leveraged loan issuers to reset risk that could pressure credit profiles and cash flow generation. This risk is most acute for deeply speculative-grade credits with large amounts of floating rate debt, already large interest burdens, and limited to negative FCF. Near-term interest rate risk is most evident for leveraged issuers who took advantage of longstanding favorable market conditions to issue large amounts of floating-rate debt, but whose credit profiles deteriorated due to secular challenges or idiosyncratic issues that resulted in higher leverage, depressed cash flows and limited liquidity. Retail companies, for example, with high floating-rate debt exposure could be particularly exposed to interest rate risk if secular challenges offset the benefits of an accelerating economy on top-line growth. From a credit profile perspective, we are less concerned about exposure to fixed-rate high-yield (HY) bonds. Historically, HY spreads do not increase meaningfully until after the Fed has concluded its tightening cycle. As a result, modest policy rate increases may not be accompanied by corresponding increases in spreads. Interest rates typically rise in response to higher inflation, usually during economic recoveries, implying generally improving credit profiles. Fitch's Stable Outlook for US Corporates in 2017 supports this view. Moreover, companies have been proactive in managing maturity profiles. US corporates have aggressively refinanced during nearly a decade of low interest rates, pushing out maturities with long-dated, low-coupon debt to maintain historically strong interest coverage metrics and solid liquidity profiles. We expect fundamentals to remain stable as expectations of growth in cash flow are fueled by persistent cost controls, efficiencies, and revenue growth, albeit weak. The Trump administration's tax proposal to cut the corporate tax rate to 15% and eliminate the tax-deductibility of interest expenses adds another layer of risk. Negative cash flow impact from the removal of interest expense deductibility may outweigh the positive cash flow impact from the corporate tax cut for issuers with high debt burdens and debt costs. A Fitch study, set to be released next week, examines this potential negative impact. Contact: Hugo Sancen Associate Director +1 312 368-2096 Fitch Ratings, Inc. 70 W. Madison Street Chicago, IL 60602 Rolando Larrondo Senior Director Group Credit Officer +1 212 908-9189 33 Whitehall Street New York, NY Derek Kim Analyst +1 212 908-0693 Kellie Geressy-Nilsen Fitch Wire +1 212 908-9123 Media Relations: Alyssa Castelli, New York, Tel: +1 (212) 908 0540, Email: alyssa.castelli@fitchratings.com. Additional information is available on www.fitchratings.com ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. 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