July 21, 2017 / 12:22 PM / a month ago

Fitch: EMEA Leveraged Credits Resilient to Interest Rate Stress

(The following statement was released by the rating agency) Link to Fitch Ratings' Report: EMEA Leveraged Loan Interest Rate Stress here LONDON, July 21 (Fitch) A stress test of Fitch Ratings' EMEA leveraged finance portfolio shows 94% of issuers could comfortably cope with a 200bp rise in variable borrowing costs. Real cracks would only start to appear if rates jumped by 500bp. This reflects the unnaturally low current rate environment and reinforces our focus on refinancing risk as the biggest threat to credit quality. We see the current period of low interest rates in advanced economies as cyclical, rather than structural, and expect real interest rates to gradually normalise. The process will be slow, and Europe is further from this normalisation than the US, but we have stressed for the impact of an immediate rise in variable borrowing costs to gauge the impact on companies' interest coverage ratios. A 200bp stress would leave 19 credits, 6% of our sample of 308 EMEA leveraged high-yield bond and loan credits, with EBITDA below 1.5x interest expense, meaning they would have very little room for underperformance or capex, assuming unhedged exposures. This compares to five credits with a ratio below 1.5x currently. Under a 500bp stress, 19% would have interest coverage below 1.5x and 5% would have a coverage ratio of less than 1x. Lodging and restaurants is probably the most exposed sector as it has one of the lowest interest coverage levels and combines relatively high cyclicality with heavy capex commitments. Cyclicality and capital intensity are key factors in assessing what is a sustainable level of interest coverage. The resilience of the overall portfolio to rising interest rates is largely a function of the low rate environment, which has meant leverage, rather than interest coverage, has been the key benchmark used in assessing credit quality. One risk in a rising rate environment is that companies will need lower leverage multiples to be able to refinance. The reversal of quantitative easing could reduce capital flows to high-yield and leveraged loan funds, putting pressure on spreads, and higher rates could weaken equity valuations and valuation-based lending metrics. But as rising rates would reflect normalising economies, these pressures could be balanced by improving business fundamentals and risk appetite. For more information on leveraged borrowers' exposure to rising rates, see "EMEA Leveraged Finance Interest Rate Stress" published today and available at www.fitchratings.com or by clicking the link above. Contact: Alex Griffiths Group Credit Officer Global Corporates +44 20 3530 1709 Fitch Ratings Limited 30 North Colonnade London E14 5GN Edward Eyerman Managing Director Leveraged Finance +44 20 3530 1359 Simon Kennedy Senior Analyst Fitch Wire +44 20 3530 1387 Media Relations: Adrian Simpson, London, Tel: +44 203 530 1010, Email: adrian.simpson@fitchratings.com. The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings. ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. 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