Maturity wall: what maturity wall?
We saw a great disparity among strategists in terms of default-rate projections for this year. With the cost for corporates to refinance their debt considerably higher than we saw in 2020 and 2021, and an elevated volume of upcoming maturities, many market participants predicted a default rate markedly higher than what we have seen so far.
Looking at current default rates, according to JPM (including distressed exchanges), the par-weighted US high-yield (HY) bond and loan default rates are 2.53% and 3.17%, respectively. For context, the 25-year average for the two are 3.4% and 3.0%. When looking at the other side of the Atlantic, the European HY default rate is 2.75%.
Overall, whilst default rates have weakened relative to the record lows seen in 2022, they remain relatively resilient versus historical averages. Encouragingly, there are only a few warning lights flashing for the distressed universe too. Stresses observed in this sector can be considered a precursor to increasing default activity. The sector is composed of bonds trading at or above a spread of 1,000bp and, using the US HY market as an example, decreased to a 21-month-low of just 6.2% of the non-defaulted US HY universe. All in all, very positive for the market, with no forward-looking concerns of deterioration.
As mentioned in a previous blog , this year has seen a buoyant new issue market, particularly in the US, which has helped break down the maturity wall many strategists believed would derail default rates. The implied cost of refinancing HY bonds, after the rally in yields, is now at its lowest since mid-2022. Corporate treasurers, particularly in the US, have used this as an opportunity to refinance, with corporate supply +30% relative to the same time last year. And most deals that have come to the market have been well oversubscribed, even at the lower end of the ratings spectrum.
Looking at the current maturity wall, the need for refinance within the leveraged finance remaining in 2024 is now minimal, with 2025 levels also very digestible. As an example, the US HY average issuance over the past decade (ex-2022) is $340bn, ~$206bn of which is related to refinancings, but we must wait until 2027 before seeing a refinancing need of that magnitude as the graph below shows.
Source: BAML November 2023
Source: BAML March 2024
This is the same trend as the other side of the leveraged finance world: leverage loans. Looking even more granularly at CCC, the lowest quality part of the credit spectrum and therefore names that are seen as most ‘at-risk’, refinances through to 2025 in US HY are a fractional 2% of the HY market, with the majority skewed to 2025. It is particularly reassuring for the lower-rated corporates to refinance their debt as they are generally not as diversified as their higher quality peers in terms of the range of maturities in their debt stack. All of this should consequently lend itself to a default rate that remains healthy.
The environment is evidently brighter for lower-rated corporates, and the outlook for benign default rates continues to unfold as companies are now facing less immediate refinancing obligations as corporates continue to churn through upcoming maturing debt. Whilst we know refinances are not going to be as negligible as we have seen over the previous two years, we do believe that given most of these are in the BB space, along with the fact issuers have been preparing to address these maturities for some time as well as the natural demand sitting on the sidelines for new issuance, bodes well for an environment that is conducive to a healthy primary market.
The credit fundamentals/technicals continue to knit together a constructive outlook for corporates but we are aware that there are potential exogenous risks. That is why, to us, it still makes sense to stay high in quality and avoid cyclical and idiosyncratic risks. With most defaults occurring in CCC, focusing on higher ratings remains prudent at this point in the cycle.
