An interest rate hike earlier this month looks to negatively affect some businesses as they are least prepared to handle it.
In the first increase in rates since 2006, the Federal Reserve raised interest rates by 25 basis points on loans earlier this month. While some tout the move as being a good sign for the economy, a recent survey of companies by Standard & Poor shows numerous companies with low credit ratings and negative outlooks in a recent survey.
As part of the Federal Reserve’s increase in rates, the bank announced its intention to gradually increase the rate further as economic conditions permit.
It could take a few years for the current increase to impact companies as they look to refinance existing debt or take out new loans.
The number of companies described as “weakest-links” by S&P came in at 195, the highest number since March of 2010. The bulk of the weakness comes from the oil and gas and financial sectors, accounting for 34 and 33 of the 195 respectively.
A two year slide in the price of oil has caused a significant decrease in domestic drilling for oil, with companies such as Pioneer Natural Resources already cutting 250,000 jobs with additional layoffs expected. CEO Scott Sheffield stated in an email the company has plans to trim 20 to 30 percent of it’s budgets in 2016, a reality which can be seen across the oil and gas industry.
Bond markets are also a factor, combining with the interest rate hike and the projected profit weakness in a number of sectors. A measure of the amount of risk priced into bonds, known as the U.S. distress ratio, came in at 20.1% in November. This is the highest level for the index since September 2009 when the ratio hit 23.5% according to S&P.
Of the indicators used by S&P, the oil and gas industry accounts for the highest dollar value of distressed debt which comes in at 37% of outstanding debts. The metals, mining and steel industry, while not as consequential in terms of dollar value, is shown to have 72% of its assets as distressed.