Higher for longer rates will test corporate debt’s maturity wall
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The prospect of higher for longer rates got a lot more real these last few months — and it'll make it harder for high-debt companies with upcoming maturities to refinance their debt.
The big picture: The lagging impact of the Fed's policy-tightening is on full display in the corporate market, where much of the borrowing is fixed-rate. Nearly everyone took advantage of easy money in 2020-21 to refinance.
- As a result, there wasn't a ton of debt that needed to be addressed in the year and a half since the Fed started raising rates.
- But, but, but: The refinancing needs really jump in 2025 — that's the beginning of a big "maturity wall."
How it works: That may seem far away, but it's really not. Typically, companies address maturities at least one to 1.5 years in advance; if they don't, it's often a signal of trouble.
- So the next year will be vital for the class of '25 and '26 to prove they've got their balance sheets under control.
Meanwhile: Higher interest rates have already helped push up defaults. After sitting at unusually low levels in 2021, the default rate in the U.S. is now back in line with the historical average, according to Moody's Investors Service.
- The big question: How much higher it'll go, as capital becomes harder to come by.
Zoom in: Take a company like Staples — the office supplies retailer has bonds due in early 2026, that it pays just 7.5% annual interest on. But these bonds trade at distressed levels — 82 cents on the dollar, yielding nearly 17%.
- That's the market saying the bonds aren't refinanceable, at least not right now.
How it got here: Staples was purchased by private equity firm Sycamore Partners in a debt-financed deal in 2017 — and then in 2019, the company took on another $1 billion in debt in order to pay a dividend to Sycamore.
- Those deals were enabled, in large part, by an era of rock-bottom rates that's now definitively over. The math worked for the capital structure back then — but there was little margin for error.
- Throw in a little earnings deterioration and a much higher cost of debt, and it starts to look unsustainable.
Zoom out: Whether the wall proves problematic for the market may depend largely on the almighty U.S. consumer — if companies can continue to grow, then higher interest rates are less of a threat.
- "If EBITDA and revenues are still in a pretty healthy place, then there's still going to be plenty of capital to refinance the vast majority of companies," says Will Smith, AllianceBernstein's director of U.S. high-yield credit.
- Also: It's really tough to have a big default cycle in credit if the job market is incredibly tight, Smith adds.
Where it stands: Last month there was a spurt of corporate debt issuance — the busiest month for the market in nearly two years, as many companies capitulated to the view that rates aren't coming back down any time soon.
- But there's still a ton of refinancing that needs to happen, says Smith, adding that he's surprised there hasn't been more by now. "I would have anticipated companies would be a little bit more scared to have [maturities] hanging over their heads," he says.
- Of note: Exactly zero of that September issuance had "CCC" credit ratings — the fifth consecutive month with such a distinction, according to PitchBook LCD. That's the lowest and most risky rating category, where companies will have the toughest time affording the current market rates.
💭 Kate's thought bubble: I'm old enough to remember the hand-wringing over a maturity wall that loomed large when the markets froze amid the 2008 financial crisis. The concerns were different then, and more existential.
- Eventually, the market chipped away at that wall — though not without some pretty large bankruptcies. Don't be surprised if something similar happens this time around.
Go deeper: How San Francisco Fed President Mary Daly thinks about the maturity wall
