U.S. corporations will continue their buying spree to offset a prolonged period of slow economic growth, according to a report released Wednesday by Moody’s Investors Service.
The robust merger and acquisition activity will be aided by inexpensive financing due to continued low interest rates, even if the Federal Reserve starts raising rates later this year, Moody’s says.
“The corporate imperative to grow remains intact, with the still-slow U.S. economy continuing to push companies to seek expansion through non-organic means,” Moody’s senior vice president Bill Wolfe said in the report. “We expect interest rates to rise later this year, but only modestly, thus rate hikes are unlikely to slow M&A activity for some time to come.”
M&A activity won’t be constant, Moody’s says, because market conditions will not always be optimal. For example, debt issuance in mid-2015 has been disrupted due to unusually high volatility in bond yields, and the oil-related energy market “continues to search for a new equilibrium” after oil prices plunged last summer.
Aside from M&A activity, rising interest rates will not threaten U.S. corporate corporate credit quality in 2015 or 2016, the report says. However, management teams will eventually have to make choices as the cost of debt increases.
“As U.S. interest rates go up, companies’ willingness to modify their behavior will be as important as their ability to do so,” Wolfe wrote in the report. “Higher rates will eventually force choices. If companies judge the cost of accommodating higher interest rates to be excessive and leverage and shareholder return activity don’t moderate as rates rise, more credit rating downgrades are likely after 2016.”
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