OREANDA-NEWS. December 22, 2015. Rising interest rates and a gradual end to the era of easy money are unlikely to significantly weaken the credit metrics or threaten the ratings of investment-grade US corporates, Fitch Ratings says. Some high-yield sectors, including oil and gas and natural resources face heightened risks, which are already reflected in our ratings and default expectations.

We expect rising US interest rates to mostly adversely affect the lower-rated entities in the high-yield (HY) market, just as low oil and coal prices have exposed weaknesses in the oil and gas and commodity sub-sectors. In particular, this could include credits rated 'B' and below that already face a mixture of long-term solvency issues, refinancing risk, unproven business models, lack of free cash flow and high leverage.

This will likely be reflected in significant divergence in default rates between high-yield sectors. Our 2016 headline US HY default forecast rate is 4.5%, USD66bn of defaults, but we expect a default rate of 11% in the energy sector.

The favourable bond market and small pricing difference between 'A' and 'BBB' category bonds has led investment-grade companies to reassess their optimal capital structures. This has driven a gradual migration down to the 'BBB' rating category and a modest rise in the median investment-grade leverage ratio to 2.8x from 2.5x in 2011. But while debt and leverage have risen, investment-grade corporates have pushed out debt maturity schedules, reducing potential refinancing pressures.

Gradually rising interest rates may also reduce the attraction of share buybacks, which have been a significant contributor to higher leverage and subsequent downgrades for US investment-grade companies. We expect steady growth in the US economy, which may prompt companies to invest for growth, rather than buying back equity to flatter earnings per share. Higher US interest rates also weaken the economic argument of raising debt to buy equity.