What Do Rising Interest Rates Mean for Restructuring?

Rising interest rates can fuel distress, but restructuring professionals don’t expect an immediate uptick from the newly announced rate increase.

The Federal Reserve on Wednesday announced a 0.25% increase to its benchmark interest rate, which has hovered near zero for seven years. Further rate increases are expected to bring the rate up to 1.375% by the end of next year, The Wall Street Journal reported.

Higher interest rates make credit more expensive for companies to obtain, which can make it tougher for them to refinance burdensome debt loads. The cheap credit of recent years has allowed distressed businesses to push out debt maturities, keeping them out of bankruptcy. Recent years have seen chapter 11 filings fall to historic lows, though other economic trends—like falling oil and coal prices—have spurred a spate of filings this year.

Restructuring experts don’t expect those filings or other restructuring activity to dramatically increase any time soon. “It’s such a small increase that when one does the math, it’s not going to affect borrowers that significantly,” said Alan Holtz, a managing director at turnaround firm AlixPartners.

“Much ado about nothing relative to restructuring,” said Dan Dooley, chief executive of turnaround firm MorrisAnderson. “Interest rates would probably have to go up 200 basis points to have any noticeable impact on our business.”

Mr. Holtz said the rate increase is notable not for the amount but for the message it sends.

“It’s a signal that there’s potential additional increases, and additional increases will lead to greater restructuring activity,” he said. “It’s a good sign of more work to come.”

But when will that work pick up? According to Moody’s Investors Service, it could be a few years. The ratings firm said many companies won’t feel the pain until 2017 or 2018, when they are trying to refinance debt coming due in 2019 and 2020.

Write to Jacqueline Palank at [email protected]. Follow her on Twitter at @PalankJ