High interest rates have changed how Moody’s evaluates credit risk. The ratings agency now places greater emphasis on leverage when assessing borrowers. Atsi Sheth, Moody’s chief credit officer, said rising interest costs make debt levels more important than before.
For years, low rates allowed companies to carry heavier debt loads without immediate strain. That environment has shifted as central banks keep borrowing costs elevated. Moody’s now treats leverage as a primary signal of credit strength or weakness.
Higher interest expenses directly reduce cash flow available to repay debt. Companies with large variable-rate obligations feel the pressure first. Even fixed-rate borrowers face higher costs when they refinance maturing debt.
Sheth’s comments reflect a broader reassessment across credit markets. Rating agencies are adjusting models that were built during an era of cheap money. The focus is shifting from liquidity coverage to sustainable debt-service capacity.
Investors should watch leverage ratios more closely in this climate. A company with modest debt can still struggle if interest costs consume a large share of earnings. Moody’s is factoring that dynamic into its ratings.
The change does not mean high leverage automatically triggers a downgrade. It means leverage carries more weight alongside other factors like industry stability and cash flow predictability. Context still matters for every rating decision.
Companies can adapt by reducing debt, extending maturities, or locking in fixed rates. Those steps may ease pressure before interest costs climb further. Moody’s will continue to monitor how borrowers respond to the new rate environment.
