Junk borrowers are stuck between a $2tn rock and a hard place
Huge supply means investors can afford to be picky, driving costs even higher for the most risky borrowers
It’s harvest time in the US, and not just for farmers. Companies, too, are reaping what they sowed after piling on debt during the post-Covid period of ultra-low interest rates. Trillions of dollars’ worth of bonds and loans are coming due for refinancing while interest rates are uncomfortably high.
Almost $2tn worth of speculative-grade debt and loans reach maturity in the next five years, according to Moody’s Ratings, of which $438bn is due by the end of 2028. That might seem like a long way away, but finance departments like to get this sort of thing sorted in plenty of time: by the middle of next year, even a late-2028 maturity will feel uncomfortably close.
The amount junk-rated companies owe within two years has risen 31 per cent compared with a year ago. Factor in a “pull-forward effect” — companies tend to refinance several tranches of debt at the same time when the earliest comes due — and near-term financing requirements grow further.
That’s awkward, because raising cash is pretty expensive right now. Rising inflation has driven up borrowing costs across the board. On top of that, the glut of debt issuance by tech giants certainly hasn’t helped.
The effective yield on publicly-issued junk debt has risen to 8.1 per cent from 6.5 per cent 12 months ago, according to Ice and BofA data. Huge supply means investors can afford to be picky, driving costs even higher for the most risky borrowers.
The travails of software maker group Planview give an example. It has more than $1.5bn in debt outstanding from a 2020 buyout, most of it due next year, but has spent more than six months trying to address the upcoming maturities. S&P Global Ratings last week downgraded the company deeper into junk territory, warning that “elevated leverage and soft financial performance could impede management’s efforts”.
But even high-quality companies could be in for a payment shock. There’s $1.6tn of investment-grade debt maturing by 2031, according to Moody’s. High-grade corporates tend to borrow for longer periods, so a higher proportion will be returning to the market for the first time since rates increased in 2022.
Companies that want to avoid a big increase in debt-servicing costs have a few options but none are very attractive. Many have already kicked the can down the road by extending existing arrangements to 2030 or 2031. Private credit can also offer more flexible terms, including options to pay-in-kind, but that increases their principal balance.
Waiting it out is another choice with even higher risks. Equity investors don’t appreciate companies sailing too close to the wind — as analysts at Citigroup highlight, even high-growth stocks have been falling if they have weak balance sheets. Perhaps an end to the Iran war is right around the corner and inflation worries will soon be a thing of the past. But for those taking such a gamble, the cost of being wrong could prove very high.