R.I.P. maturity wall: Companies are refinancing at a breakneck pace
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The current risk-on mood isn't just in stocks and crypto — it's palpable in the debt market as well.
Why it matters: The portion of the leveraged loan and high-yield bond market trading at distressed levels is shrinking fast, and a blitz of deal activity is breaking down a maturity wall that looked worrisome a year ago. This is all despite interest rates remaining at their highest point in two decades — or maybe because of it.
The big picture: The high-yield and leveraged loan markets are where riskier companies with the lowest credit ratings borrow, so they're the most vulnerable to default and bankruptcy when money gets more expensive.
- At the end of 2022, about $281 billion of this debt was trading in the secondary market at distressed levels, according to JPMorgan. But as of the end of February, that amount had nearly halved, to $157 billion.
- And thanks to a flurry of refinancing activity, the amount of debt coming due in 2024-2026 has been cut by 40%, or $329 billion, compared with where it stood a year ago, BofA Global Research calculates.
- There's been so much refinancing that "this episode represents one of the most aggressive instances of maturity extension in the history of leveraged finance," BofA analysts wrote in a research note on Friday.
What happened: For one, the economy hasn't gone into recession as many feared it would when the Fed started hiking rates aggressively in 2022.
- Evidence of those fears fading: High-yield bonds' average spread over Treasuries has tightened so much that it's now neck-and-neck with the lows of 2021.
- Meanwhile, most investors don't look at spreads — they look at yields, or the actual return they'll pocket on their money. And yields are at historically attractive levels — thanks to the Fed keeping its policy rate high — even as recession risk has ebbed.
What they're saying: "The fact that yields are now consistently in that 7.5%-9.5% range makes a big difference for someone's portfolio," says Ken Monaghan, co-head of high yield at Amundi US.
- Those nice yields also make the risk-reward tradeoff against equities look much more compelling for investors than they did in the days of rock-bottom rates.
- "One reason there's been such a strong bid for credit is because it hasn't looked this attractive relative to equities since 2001," says Danielle Poli, portfolio manager for Oaktree Capital Management's global credit strategy.
Reality check: High yields may be good for investors, but they're not great for companies.
- In the longer run, many companies that borrowed too much when rates were low won't be able to afford higher interest costs for a sustained period.
- But, with the market now awash in investor cash, "for a lot of companies, that day of reckoning is not today, or tomorrow — it's down the road," says Allan Schweitzer, head of distressed credit at Beach Point Capital Management.
