Is Your Credit Portfolio Ready for Rising Interest Rates?

Recently, the Fed raised rates a quarter point.

As expected, Fed Chair Janet Yellen reiterated that we can expect two more rates increased before the end of the year and another 3 increases in 2018.

While by historical standards, interest rates are still low, a gradual return to higher levels will have an impact on your customers and suppliers -- especially highly leveraged companies.

If your financially stressed customers and suppliers need to refinance debt at higher rates, it’s time to ask: will they be able to?

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Drowning in Debt

For most financially resilient companies, a long-expected interest rate hike will not present an immediate burden. Even a string of increases won't derail well financed companies.

However, for highly leveraged companies, it’s important to pay extra attention to refinancing needs. Generating enough cash from operations may already be a struggle, and higher borrowing costs will make covering interest expenses that much more difficult.

For these companies, it’s important to pay extra attention to refinancing needs... and the timing of those needs. Highly levered companies with maturities coming due in the next couple of years could be at a heightened risk for financial distress. In other words, it's both the level of debt and the timing of a company's refinancing needs that matter.

This is particularly true for companies in distressed industries like solar, energy, and retail, where a greater concentration of high risk industry participants are already drowning in debt.  

What a Fed Rate Hike Means for Credit Refinancing Risk

So, should you be concerned about a rate hike? Without question, yes.

How much you should be concerned depends on your credit portfolio. While it’s not an issue for your customers and suppliers on solid financial ground, it signals tougher credit decisions for your higher risk counterparties. You don't want to find out too late that a customer can't pay or that a supplier is cutting corners to save cash.

To put refinancing risk in context: in the article 9 Companies Where Refinancing Could Lead to Financial Distress, we looked at how debt maturities in conjunction with an evolving credit market could mean serious credit risk for some public companies.

The combination of limited access to capital and staggering debt loads is a recipe for financial distress amid continuing rate hikes. For instance, some large public companies have a debt to asset ratio exceeding 100%. Fed rate hikes and the inability to come up with liquid capital can make it near impossible for companies to surmount this kind of debt.   

Be proactive to mitigate interest rate risk

As you assess your portfolio risk, pay particular attention to what a rate hike will mean to these highly leveraged or below investment grade public companies, before the Fed's gradual tightening starts to impact your suppliers and customers.

Watch those companies like a hawk.

Need help assessing the financial health of your credit portfolio or supply chain? Use the FRISK® score for advance warning of increasing risk -- it's 96% accurate in predicting financial distress over the coming 12-month period. And please get in touch if we can help with a free personalized portfolio risk review.

Get help identifying your risk exposure: Contact us for a free personalized portfolio risk review

About CreditRiskMonitor

CreditRiskMonitor is a financial news and analysis service designed to help professionals stay ahead of public company risk quickly, accurately and cost-effectively. More than 35% of the Fortune 1000, plus thousands more worldwide, rely on our commercial credit reporting and predictive risk analytics for assessing the financial stability of over 58,000 global public companies.

At the core of CreditRiskMonitor’s service is its 96% accurate FRISK® score, which is formulated to predict public company bankruptcy risk. One of four key components calculated in the FRISK® score is crowdsourced subscriber activity. This unique system tracks subscribers' patterns of research activity, capturing and aggregating the real-time concerns of what are essentially the key gatekeepers of corporate credit. Other features of CreditRiskMonitor’s service include timely news alerts, the Altman Z” score, agency ratings, financial ratios and trends. CreditRiskMonitor’s network of trade contributors provides more than $135 billion in trade data on their counterparties every month, giving them visibility into their biggest dollar risks.