Interest rate rise: turning point looms for US debt binge

With a $4tn mountain of debt maturing over the next five years, corporate America’s reliance on cheap cash is about to get tested.

With the prospect of steadily higher interest rates in the coming years as the Federal Reserve gradually tightens policy, US companies that tapped global markets for inexpensive finance over the past four years will soon face a different environment.

But as rates turn higher, investors may see the flip side of cheap financing. Analysts warn companies will begin defaulting in greater numbers, particularly in the energy sector, which has found itself in the line of fire as commodity prices languish.

But this hearty bond borrowing binge could be challenged this year. Traders are betting that the Fed will lift interest rates in December, while many economists and analysts are leaning towards a hike as early as this month. “It has become clear we are close to the point when the Fed starts to raise rates,” says Hans Mikkelsen, a strategist with Bank of America Merrill Lynch.

Moody’s and S&P warn that defaults are likely to increase in the coming years as interest rates rise, a concern echoed by bond funds such as Pimco. Analysts with S&P expect defaults among junk-rated US companies to hit 2.9 per cent by June 2016, nearly twice the rate in 2013. Moody’s list of companies rated B3 with a negative outlook or lower — its lowest rating rungs in the “speculative” space — eclipsed 200 for the first time since 2010 in July

“Credit quality has been deteriorating by and large over the last three years,” says Bill Wolfe, an analyst at Moody’s. “Speculative grade companies, they’ve taken advantage of very buoyant market conditions over the last few years. The number of weakly rated companies we rate is much greater than it used to be.”

But not all companies will be affected equally, with indebted energy companies likely to be the biggest victims. Eric Gross, a strategist with Barclays, points out that the concern for lowly rated energy companies is not if they pay 7 per cent or 9 per cent interest rates, but whether “they can get financing at all”.

Analysts say the pharmaceuticals and healthcare industry, which has been engaged in a wave of debt-fuelled dealmaking, could be one of the hardest hit sectors when rates rise.

Full article: Interest rate rise: turning point looms for US debt binge (Financial Times)

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