US groups face $3tn debt refinance crisis
US financial institutions and junk-rated borrowers may struggle to refinance nearly $3tn in debt set to mature by the end of 2016 as global volatility threatens demand for risk assets, Standard & Poor’s warned on Thursday.
The rating agency predicted that any challenges would arise after 2013, with the robust issuance of the past few years being sufficient to cover maturities until then.
“With fears of European Economic and Monetary Union [eurozone] contagion, a harder than expected landing in China’s economy and a potential economic slowdown in the US, consistent investor demand for risky assets is not guaranteed over the next few years,” S&P said.
Financial issuers account for the highest share of maturing debt, with $1tn in bonds and loans coming due within the next 4½ years, according to S&P.
But refinancing risk could be even higher for non-financial companies in sectors such as media and entertainment as well as oil and gas, which have $247bn of junk-rated debt scheduled to mature in the same period.
The latest bout of risk aversion in the capital markets over the last month highlights how the appetite for certain types of debt can quickly dry up in spite of their higher yields relative to US Treasuries.
After a strong start for the year, investors have been cashing out of funds that specialise in junk-rated corporate debt, for example. Outflows accelerated in the past four weeks and last week’s redemption was the largest in 2012.
Average yields on junk bonds peaked this year at 8.15 per cent on June 2, according to a Barclays index. Since then, yields dropped to 7.87 per cent on Wednesday but are still higher than this year’s 6.96 per cent low, hit in May.
New issuance has also declined in recent weeks. Average monthly issuance of US non-investment grade debt from January to May was $28bn, but only $612m in high-yield debt was was sold so far in June, Dealogic, the data provider, said.
However, S&P said it did not expect a jump in default rates through 2016 and the highs experienced in 2008 and 2009 will not be seen unless the US economy faces a severe recession.
S&P said that the ability of junk-rated companies to refinance their debt will depend on both the health of the US economy and how hungry investors are for yield.
“On the flip side, if the Federal Reserve and other central banks launch more concerted rounds of monetary easing, then the credit markets could become even more supportive of corporate refunding,” the rating agency said.
Additional reporting by Nicole Bullock in New York