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U.S. Corporate Debt Maturing In Five Years Rises To Over $2 Trillion

Thursday, January 31, 2019  
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Mayra Rodriguez Valladares | Forbes
January 22, 2019 

 

Mountain of debt of debt maturing in five years is growing.GETTY

U.S. corporates’ speculative and investment grade debt maturing in five years has now risen to over $2 trillion.  According to the Federal Reserve, as of the end of 2018, private non-financial institutions corporate debt is about $15 trillion, or about 70% of U.S. GDP; hence the remaining $13 trillion does not refinance until after 2023.

The speculative-grade non-financial corporate debt maturing over the next five years, 2019-2023, has grown to slightly over $1 trillion.  According to Anastasija Johnson, VP-Senior Analyst at Moody's Investor Services, "A combination of lower issuance, heavy maturities, climbing interest rates and widening spreads points to a more challenging refinancing environment for speculative-grade companies," This level of debt is an increase from $988 billion last year,  that covered 2018-2022 maturities.

Speculative grade maturities exceed $1 trillion.MOODY'S INVESTOR SERVICES

Total maturities rose 6% and slightly below the record $1.063 trillion set in the 2017 Moody’s Investor Services study. Both speculative-grade bank and bond maturities rose, with the bank maturities expanding faster at 9%, to $589 billion, and bonds climbing 2%, to $455 billion.

 

Refunding needs for 2019-2023 near record.MOODY'S INVESTOR SERVICES

The rise in US speculative-grade maturities to over $1 trillion follows a decline in bond and bank issuance in 2018 which increases refinancing risk.  Specifically, US speculative-grade bond issuance fell 43% in 2018 to $173 billion, the lowest level since 2009. According to Dealogic, there were no high-yield bonds sold in the month of December 2018; the last time that there was such a month with no sales was in November 2008. Consequently, bond refinancing risk, as measured by Moody’s Three-Year Refunding Indicator for December 2018, is the highest since May 2009. “The indicator, which measures the market's ability to absorb upcoming bond maturities though new bond issuance, ended 2018 at 2.3 times, down 47% year-on-year and 61% below its long-term average of 6 times.”  It is important to note that the Indicator does not capture how some companies that typically issue bonds are shifting to the loan market instead. According to Dealogic “While the leveraged loan issuance declined 11% to $1.3 trillion in 2018, it was still the second-highest on record. “Nonetheless, according to Moody’s Investors “a combination of lower high-yield bond issuance, record bond maturities, rising interest rates and widening spreads points to a more-challenging refinancing environment for issuers.”

Refunding risk greatest since May 2009MOODY'S INVESTORS SERVICES

What I have been concerned about for over five years is that as companies have to refinance not only will interest rates be higher than when they first took out their loans, but also, if they did not use those funds wisely, their credit quality might have deteriorated. At the point of refinancing, banks and non-banks, if they are willing to lend, will be charging higher rates.

Moody’s Investor Services data show that the Telecommunication, Media and Technology sector continues to carry the highest debt burden, almost 30% or $281 billion, of the speculative-grade debt and 31%, or $321 billion, of the investment-grade debt that is due over the next five years.  Telecommunications, one of two US industries with a negative outlook form Moody’s, has $68 billion of debt due over the next five years. However, there are more debt maturities for industries with positive outlooks compared to last year’s study. Among industries with positive outlooks, retail has the most debt outstanding at $70 billion.

 

Speculative grade debt maturities by broad industry groupMOODY'S INVESTOR SERVICES

Last year, the U.S. high yield default rate was 2.4% at the end of 2018; this is slightly above the non-recessionary 2.3% level.  According to Fitch Ratings Senior Director of Leveraged Finance, Eric Rosenthal, “Fitch forecasts a 1.5% default rate for 2019, equating to roughly $19 billion of volume.” Fitch Ratings also announced last week that high yield issuance declined significantly in 2018 to $143 billion, 41% from 2017.This is the lowest level amassed since 2008.  Thus far, this year issuance has been very muted; only two deals have come to the market.

For U.S. non-financial institution investment-grade corporates, five-year debt maturities exceeded $1 trillion for the second year in a row.  This is 2% more than the $1.032 trillion due in 2018-2022. While the debt burden has risen, the increase is “more modest relative to the average maturity growth over the last several years of approximately 9%.” According to Natalia Gluschuk, Assistant Vice President at Moody's, "most investment-grade companies are well-positioned to refinance their maturities in 2019 given that investors remain receptive to high-quality credits, although financial market volatility is likely to increase and costs may rise."

 


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