Heavily indebted retailers are one of the only corporate groups that should be concerned over the possibility of the Federal Reserve increasing the benchmark interest rate this week.
Federal Reserve chairwoman Janet Yellen announced earlier this month that at the Federal Open Market Committee March 15 and 16 they’ll discuss implementing an incremental interest rate hike, given job gains and relatively tame inflation in the U.S.
While the centralized bank has been hinting at a 2017 rate hike for a couple of months, analysts had not expected rates to rise so early in the year, and retail stocks faltered on the news, Fitch Ratings said Monday.
The ratings agency singled out retail companies in a brief analysis of corporate risk presented by an interest rate increase, saying those with high amounts of floating rate debt are “particularly exposed to interest rate risk.”
At the end of February, Moody’s Investors Service said that about 14 percent of the retailers it monitors, including Claire’s Stores Inc. and True Religion, are now considered to be in a distressed debt position, the highest rate since the Great Recession, when such ratings peaked at 16 percent.
Similarly, retail lenders are open to more risk than other debt issuers, especially those “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,” according to Fitch.
As for corporates in general, however, Fitch said interest rates increasing this year and next “will not be a broad concern” since so many companies have “aggressively refinanced during nearly a decade of low interest rates.”
The last benchmark increase was in December, to a range of 0.5 percent to 0.75 percent, which is still low by historical standards. Higher interest rates make it more expensive to do everything, like buying a dress with a credit card or borrowing money to trade on Wall Street, and the federal rate has been kept low for several years in an effort to stimulate the economy after the recession of the late Aughts.
The central bank has previously mentioned raising the rate in 2017 in three installments of 0.25 percent.
Yellen explained earlier this month that the committee is currently projecting “that economic activity will expand at a moderate pace in coming years, labor market conditions will strengthen somewhat further and inflation will be at or near 2 percent over the medium-term.” In other words, the economy has stabilized and interest likely will need to go up to head off inflation.
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