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Interest rates loom small in operators’ outlook


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Every Fed day sends jitters around the stock market and has consumers wondering what it means for their next car or home loan. But for franchisees building restaurants with debt, moves by the Federal Reserve can materially change access to capital and fixed finance costs.

As the Federal Reserve brings us out of a historically low interest rate environment, business operators are justifiably concerned.

Charles Green, director of the Small Business Finance Institute, said the low, low interest rates have helped fan the flames of growth.

“It’s really like a damper. You had all this cold air coming in virtually unmitigated for eight years in an effort to pull us out of a very serious recession and reignite the credit markets that were totally restrictive for a bit,” said Green. “That has largely worked. It hasn’t worked on the grandiose level that we’ve seen in earlier years because of lots of structural differences.”

Roger Matthews, managing director and head of restaurant investment banking at Bank of America, said anyone who made a debt deal whether through growth, mergers and acquisitions or recapitalization did well with the damper wide open.

“I think in general, anyone who is aggressively using leverage benefited from this environment,” said Matthews.

One of the few losers were those smaller-buzz brands that couldn’t take advantage of the low, low rates. “They don’t use any debt because they don’t have access to the debt market because they don’t have a base of profitability yet,” said Matthews.

But of all the macroeconomic concerns out there, interest rates just aren’t a big concern for the next year or more. According to a recent survey of more than 500 middle market CFOs by Bank of America Merrill Lynch, 70 percent said interest rates would have no impact on how they would invest working capital. That’s up from 51 percent in 2015, suggesting any preparation for higher rates has already been done.

Indeed, everyone affected by interest rates to a large degree saw the hikes coming. And even that 30 percent of respondents who expected an impact have plenty of time to align their businesses to a higher interest rate environment.

“We’re looking at delaying the impact of any change until the first quarter of 2017,” said Green. “In my judgment they’ve got 150 to 200 basis points free parking where they can move the rates that much and not impact businesses in a serious way.”

According to Green, even a 1.5 to 2 percent bump is “laughable” in a historical context—he recalls 20 percent interest rates in the 1980s.

Even as short-term interest rates grab everyone’s attention, long-term rates are steady—they actually came down in the wake of the Fed’s initial quarter- to half-percent bump late last year. So anyone looking to use debt financing to build a new location is actually going to see pretty attractive rates in the near future.  

“We don’t believe long-term rates will go up with short-term rate rises, so we think the 10-year at the end of this year might be 50 basis points higher but the odds of it being 100 basis points higher is slim,” said Matthews.

Still, there are some macroeconomic dangers lurking in 2016. “I really think interest rates are not going to be the headline story. I think the headline story will be much more about where does wage and food inflation go in the next 12 months. I think that’s a real immediate issue,” said Matthews.

The turmoil in the stock and bond markets in the first days of 2016 are also concerning, but interest rates aren’t to blame.

“We get a little uneasy that the bond market is so jittery, because the bond market has generally been a better predictor of problems,” said Matthews. “If it’s telling us too much leverage has been added and we have too much default risk, that will cause a pullback and conservatism. And that won’t be rate-dependent.”

Then there are dismal oil prices, which are already hurting business in big oil markets like Texas and North Dakota. “That oil glut to me is a much larger and immediate problem than interest rates,” said Green.

The only way interest rates could affect the economy is by scaring people, but that seems unlikely given the Fed’s current glacial pace.

“If the Fed over the next two years were to aggressively raise rates, raise up to 2.5 percent, that would scare people just because of the speed and the pace,” said Matthews.

“Given how cautionary the Fed has been on raising rates, it’s not a big concern.”

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