That maturity wall in the corporate debt market is starting to look awfully close, Axios' Kate Marino writes.

Why it matters: 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.

What happened: 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 the big "wall." (See the chart below.)

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.

Between the lines: 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.

When the Fed started raising rates at the beginning of last year, the maturity wall was far enough away that it felt pretty theoretical.

• And anyway, the smartest folks in the markets assumed the Fed's rate hiking campaign would throw the economy into a recession. That would force the central bank to cut, all well before the 2025 wall crept up.

Yes, but: So far, that recession hasn't come — and it doesn't even seem like it's close.

• We just got blockbuster retail sales figures for September, while inflation remained hot enough to keep investors and economists a bit uncomfortable.
• It all adds up to rates staying higher for longer.

Between the lines: A recession wouldn't be great for corporate credit, either, of course. The dream scenario for many is a mild slowdown that doesn't hurt earnings too much but gives the Fed reason to start cutting rates.

The wall is built from the debt of hundreds of individual companies with maturities over the next few years.

• Staples, the office supplies retailer, is one of them.

State of play: The company 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.

Federal Reserve officials are paying attention to what happens to the maturity wall — not just for corporates but also for commercial real estate, San Francisco Fed president Mary Daly told Kate in a recent interview.

• The big question for policymakers is whether the tighter rate environment collides with the wall, leading to a disorderly unwinding in the market, Daly said.

State of play: The maturity wall is entirely foreseeable — and that's part of why Daly said the signs so far point to an orderly, rather than disorderly, transition to the new era of higher rates.

• While some investors are positioning themselves to walk away from assets — think, the owners of office buildings or high-debt companies where the math doesn't make sense with higher rates — others are positioning to purchase them.
• Especially in the private markets, vast amounts of dry powder are waiting to be deployed, with the goal of taking advantage of these dislocations.
• That's already happening. Private funds picked up distressed bank assets at a discount in the wake of the rate-driven bank collapses this past spring, for example.

"There will be winners and losers — but one person's loss is another one's good opportunity to buy," Daly said, summarizing the feedback from a group of investors and CRE professionals she recently met with.

On the flip side: A disorderly unwind usually stems from something that catches most people by surprise — causing investors to seize up or disappear, Daly noted. That's what happened in the global financial crisis and the COVID recession.

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