highyield companies in the consumer goods healthcare and entertainment industries are increasingly at risk of credit downgrades and even defaults as they battle rising interest rates and falling revenue forcing some finance chiefs to consider alternative financing options default rates for lowrated us companies will likely reach 375 for the 12 months ending in september 2023 up from 16 in september 2022 but lower than the longterm average of 41 and the 63 default rate in september 2020 ratings firm sp global ratings said in a report earlier this week that expected doubling in default rates shines a spotlight on speculativegrade rated companies such as drugstore chain rite aid corp homegoods retailer bed bath  beyond inc and herbalife nutrition ltd  which makes protein shakes and supplements each of these companies was downgraded by at least one ratings firm in recent weeks while it is unclear whether the downgrades will turn into defaults the ratings firms’ warnings come at a perilous moment the federal reserve has lifted interest rates to levels unseen for over a decade bringing the benchmark federalfunds rate to 375 to 400 earlier this month at the same time the economy has been losing steam resulting in lower earnings and darkening the outlook for companies especially in consumerfacing sectors the recent buildup of companies rated b minus—or six notches below investment grade—could contribute to a sharper deterioration of credit ratings among businesses if inflation and debtservicing costs remain high or increase further and supplychain issues persist sp said credit downgrades can drive up financing costs for companies and cause executives to take additional action such as reducing debt loads struggling businesses should consider options to restructure their balance sheets potentially by selling equity disposing of minority stakes or cutting costs said don mccree vice chairman and head of commercial banking at citizens financial group inc a bank “if there’s a downward trajectory in your rating it probably portends credit deterioration at the core” he said fitch ratings on nov 9 downgraded rite aid’s longterm default rating to c from b—down three notches—after a proposed tender for 385 million in bonds that fitch described as a distressed exchange the philadelphiabased company last month said it is facing higher costs related to its plan to close stores and warned of rising pressure on consumer spending and its supply chain for the rest of the year union njbased bed bath  beyond in september said it was considering liability management transactions—which typically allow companies to refinance or restructure outstanding obligations—tied to 284 million in bonds due in 2024 ratings firm moody’s investors service last month downgraded the company’s rating to ca from caa2 a twonotch drop citing a “very high likelihood” of a default over the next 12 months sp on nov 14 downgraded the company to selective default from cc over a distressed exchange the offer for which bed bath  beyond extended two days later rite aid and bed bath  beyond didn’t immediately respond to requests for comment companies six to eight notches below investment grade need to generate positive cash flow in part because they may have to refinance said gregg lemosstein chief analytical officer for corporate ratings at sp global ratings executives should “batten down the hatches and be able to show that you can be selffunding through this difficult period ahead” mr lemosstein said sp so far this year through the end of october has issued 215 us corporate credit downgrades—for both high and lowrated companies—up from 158 the prioryear period but down from 759 in the 2020 period when the covid19 dented companies’ earnings there were 33 sp downgrades in september the most in a single month since june 2020 but the total number of downgrades remained smaller than that for upgrades which stood at 233 at the end of october down from 361 during the prioryear period junkrated companies in recent months have been searching for the right time to tap investors with some agreeing to pay more for their debt and others renegotiating with lenders or seeking additional funding in the privatecredit market “the impact of rising rates on businesses that are low rated and mostly financed in the floatingrate market is going to be hard for a lot of companies to absorb” said christina padgett head of the leveraged finance practice at moody’s us businesses are being downgraded in part due to deteriorating cash flow and profitability levels though the circumstances are often companyspecific mr mccree said credit conditions particularly for companies below investment grade will likely continue to tighten as the federal reserve continues to tighten its monetary policy how much companies will suffer depends on the depth and the duration of a potential recession ratings professionals said businesses without immediate refinancing needs however tend to see less of a direct impact from credit downgrades sp last week downgraded herbalife the los angelesbased nutrition company by one notch from bb to b after it reported a 95 drop in revenue to 13 billion and a 30 decline in net income to 822 million both compared with the prioryear period sp said high inflation reduced consumer demand for herbalife’s products but the downgrade has minimal financial impact on herbalife because the interest rate on its current debt doesn’t depend on the rating and it doesn’t need to refinance in the coming years chief financial officer alex amezquita said the company has about 550 million in convertible debt maturing in 2024 that it plans to pay down with a revolving credit facility he said “obviously the company would prefer if sp didn’t arrive at issuing the downgrade but we understand why sp cited macroeconomic conditions as the catalyst for the downgrade” mr amezquita said