US speculative-grade companies are facing heightened refinancing and default risks amid higher-for-longer interest rates and limited credit market access, according to Moody’s Investors Service Inc.
(Bloomberg) — US speculative-grade companies are facing heightened refinancing and default risks amid higher-for-longer interest rates and limited credit market access, according to Moody’s Investors Service Inc.
Junk-rated firms have $1.87 trillion of debt maturing between 2024 and 2028, an Oct. 12 report by the credit grader shows. That marks a 27% jump from the $1.47 trillion anticipated between 2023 and 2027 in last year’s study, wrote analysts including Botir Sharipov.
“The increase – reflecting higher maturities for revolving credit facilities, loans and bonds – comes amid weak macroeconomic and credit conditions, raising companies’ refinancing and default risk,” noted the analysts.
A default wave among junk borrowers has become a concern for analysts and investors after the Federal Reserve embarked on its aggressive rate-hiking cycle last year, with 11 raises baked in so far. Moody’s expects the US speculative-grade default rate to peak at 5.6% in January 2024 before easing to 4.6% by August.
Companies rated B2 and below — that is, five or more notches deep into junk territory — will have to deal with $206 billion of debt coming due in 2024 and 2025, Moody’s data shows. That figure swells to about $1.1 trillion over the period between 2024 and 2028.
Firms rated B3 and B2, several of which are private equity-owned, struggled to refinance existing debt and issue fresh debt toward the end of 2022 and during 2023, according to Moody’s. “Higher borrowing costs, slowing economic growth and tighter lending standards make this group particularly vulnerable to downgrades, restructurings and distressed exchanges,” reads the report.
These borrowers could turn to the private debt market for funding, wrote the analysts. “Companies are also resorting to strategies such as extending loans or issuing new debt with pay-in-kind interest, often at onerous rates that raise debt and add to future default risk,” they added.
The ratings firm also sees challenges among distressed borrowers. “Companies rated Caa and lower will likely find it difficult to refinance maturities at an interest rate they can afford,” the analysts noted.
Debt issued by these firms makes up 19% of maturities in 2024 and 2025, up from 16% due in the first two years of last year’s study, according to Moody’s.
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