About $4.88 trillion of U.S. corporate debt rated by S&P Global Ratings will mature by the end of 2023, raising concerns that highly leveraged companies could be squeezed by the rising costs of borrowing in increasingly volatile credit markets.
U.S. companies account for 44% of the total global corporate debt and 62% of the world's speculative-grade debt (rated 'BB+' or lower) due to mature in that time.
S&P's main concern is that a significant chunk of the nonfinancial corporates are rated just a notch above junk status and risk slipping into the category in an economic downturn.
"While the majority of U.S. corporate debt maturing through 2023 is investment grade, $1.55 trillion is speculative grade, and we consider this debt to be at higher risk of refinancing, particularly if financing conditions turn sharply less accommodative than they've been in recent years," wrote Diane Vazza, Nick Kraemer and Evan Gunter of S&P Ratings' fixed-income research division.
The global debt picture has been marked by a shift from the financial services sector to nonfinancial corporates as regulation in the years following the great financial crisis forced banks into less risky assets.
Cheap credit facilitated by low interest rates and tight bond yields have encouraged companies to borrow heavily. U.S. rated corporate bond issuance exceeded $1 trillion annually in the past five years, and institutional leveraged loan issuance surpassed $500 billion in 2017. Almost 75% of U.S. corporate debt is held by nonfinancial corporates, with just 61% of that rated at investment grade. By contrast, 90% of the debt held by financial services is investment grade.
Vazza and her colleagues note there is no immediate need for concern about the cost of refinancing, explaining that the depth and liquidity of the U.S. credit markets can accommodate refinancing requirements. But they warn that highly leveraged firms could be vulnerable to rising borrowing costs or market volatility reducing liquidity in the next 5.5 years.
Beware of the triple Bs
At 39% of its nonfinancial corporate debt, the U.S. has a higher share of speculative-grade due to mature than the rest of the world in the coming years, with 28%. Some 63% of the maturing investment-grade debt is rated BBB, with $531.7 billion rated BBB-. Should the issuers be downgraded, the cost of reissuing could rise sharply, particularly if fewer lenders are willing to take on additional credit risk. Asset managers who are increasingly unnerved by the cocktail of interest rate rises, concerns over international trade and flattening yield curves are stressing the need for more conservative investing, giving more emphasis to safer assets in their portfolios.
Borrowing costs are already rising. The Federal Reserve increased interest rates twice during the first half of 2018 and is expected to do so twice more in 2018 and three times in 2019.
According to the Moody's Seasoned Aaa Corporate Bond Yield, as of Aug. 17 the investment grade corporate bond yield has risen 37 basis points since the start of the year to 3.87%, with speculative bonds yielding closer to 6%, according to S&P. "[C]ompanies with weaker credit profiles or fewer sources of funding could face refinancing challenges should investors become more risk averse or market conditions turn more sharply than expected."
Tax cuts have left U.S. corporates flush with cash, and incentives to repatriate cash from overseas should encourage companies to pay down maturing debt. For instance, cash-rich tech companies have the most debt of all the nonfinancial sectors set to mature in the next few years ($498.7 billion), with 69% of that investment grade. Yet these levels are still well below the long-term trends. S&P points out that the speculative-grade bond yield remains below its 10-year average of 7.7%, while the investment-grade yield is lower than its 10-year average of 4.5%.
Typically, however, companies have been rolling over debt with longer-dated issuances. According to S&P, the "maturity wall" — the point at which debt has to be repaid — is likely to be pushed back. In the 12 months that ended June 30, companies reduced the amount of debt set to mature in 2019-2020 by 9%, and the amount scheduled to mature in 2022-2023 rose by 24%.
This S&P Global Market Intelligence news article may contain information about credit ratings issued by S&P Global Ratings, a separately managed division of S&P Global. Descriptions in this news article were not prepared by S&P Global Ratings. The original S&P Global Ratings documents referred to in this news story can be found here.