Moody's Chief Credit Officer: High Rates Have Completely Changed How the Rating Agency Assesses Credit Risk

Moody's chief credit officer Atsi Sheth says high interest rates and persistent inflation have reshaped how the rating agency evaluates credit risk.

The chief credit officer of the rating agency said high interest rates and persistent inflation in the United States and other regions have fundamentally changed the way Moody's (ASX: MCO) assesses risk.

Atsi Sheth, who leads research for Moody's (ASX: MCO) global credit views, said: "We believe we are in a completely new macro cycle."

Sheth, speaking in Bangkok at the annual meetings of the International Monetary Fund and the World Bank, said in an interview that because interest costs have risen, leverage levels — the size of a borrower's debt relative to its assets — have now become more critical.

"The higher the leverage, the more severe the damage typically caused by high interest rates," Sheth said.

That stands in sharp contrast to the environment of the 2010s, when inflation and interest rates were generally low and the overall backdrop was quite loose and friendly.

She said Moody's (ASX: MCO) is also closely examining companies' pricing power. Because inflation remains above the Federal Reserve's 2% target, companies must frequently raise product prices to avoid erosion of real earnings.

"If a company has pricing power and a very solid revenue business model, then the impact of inflation on it will be much smaller," she said.

Sheth said that taking these factors together, along with geopolitical risks, Moody's (ASX: MCO) now views credit from a perspective entirely different from the past. The core question used to be: "How do you achieve growth in a low-rate, low-inflation environment?" Today's considerations are completely different.

China is the biggest exception: domestic interest rates and inflation remain low. Analysts widely believe insufficient domestic demand is the main reason.

Sheth said China's central government has room to further expand fiscal spending, but whether that brings sustainable growth depends on where the money is directed, and large-scale spending stimulus may not necessarily drive lasting growth.

If the Chinese government directs funds toward supply-side stimulus, "it will only create more new capacity," she said, "and then that capacity will shift toward exports."

Sheth said that due to concerns from multiple parties, including the Chinese government itself, "we see policies aimed at supporting growth, but no 'big-bang stimulus' has been rolled out."

Turning to the AI boom, Sheth said hyperscalers — large tech companies spending hundreds of billions of dollars to build AI infrastructure — "have very ample cash reserves, so from a credit perspective they have a certain ability to withstand risk."

She compared the current period with the early days of the internet: companies such as Global Crossing invested heavily in infrastructure and ultimately went bankrupt. Hyperscalers "also have fairly diversified non-AI business revenue, which will serve as strong support for them."

Content at a Glance: Moody's (ASX: MCO) chief credit officer Atsi Sheth says high interest rates and persistent inflation have already reshaped the agency's logic for assessing credit risk.