US junk bond issuers are poised to unleash another wave of refinancing after back-to-back years of low volume, as the share of debt with near-term maturities climbs to the highest level in more than a decade.
The amount of outstanding junk bonds set to mature in 18 to 36 months has soared to levels last seen in 2007, Goldman Sachs Group strategists including Lotfi Karoui wrote in a note.
The figure stands at 19 per cent of the total high-yield market as of the quarter ending September 30, compared to 13 per cent during the year-ago quarter and 9 per cent over the same quarter in 2021.
The growing near-term maturity wall as well as deteriorating balance sheet liquidity are likely to push corporations to issue new debt, even as borrowing costs remain high, according to the strategists.
The spread on Bloomberg’s US Corporate High Yield Bond Index stood at 423 basis points on Thursday, nearly 60 basis points wider than the lowest level this year of 366 basis points in early September.
“It’s kind of like an arm wrestling match,” said Bob Kricheff, portfolio manager at Shenkman Capital Management.
“They’re trying to time the market – which we all know is difficult – on rates, versus being prudent and saying, ‘I don’t want this to become a current debt. I want to retire it a year before it matures. Let me bite the bullet and take it out now’.
“That’s why you’re seeing people attacking 2024, 2025 and even 2026 maturities with some of these issues.”
Issuance has slowed over the last few years as the era of low-cost borrowing came to an end.
“So, the first wave of that increase in the share of bonds maturing over the next 36 months really reflects that big decline,” Mr Karoui said.
Goldman Sachs expects to finish 2023 with $170 billion of gross high-yield supply, compared to the $131 billion notched so far this year and up significantly versus 2022 and 2023.
That tally is forecast to rise to $225 billion in 2024, which “reflects our expectations of higher refinancing activity”, wrote the strategists.
Goldman also forecasts US high-yield net supply will flip back into positive territory in 2024 to about $65 billion, from around negative $40 billion so far this year.
Heightened funding costs after the Federal Reserve’s interest rate-rise spree may give some riskier borrowers pause for thought.
“I think the all-in yields should be attractive to investors, but the ramping up in capital costs due to the higher rate environment is going to be a challenge for a lot of these issuers,” said Scott Kimball, managing director at Loop Capital Asset Management.
As a result, he said borrowers are likely to wait out the higher-for-longer rates backdrop for as long as they can, although he thinks it unlikely that rates will fall any time soon.
Analysts and investors are also wary of defaults. Moody’s Investors Service sees the US speculative-grade default rate peaking at 5.6 per cent in January 2024 before easing to 4.6 per cent by August.
An upside is that the 2024 maturity mix is heavily skewed towards BB rated issuers, which make up close to 70 per cent, a CreditSights report released mid-year shows.
In Europe, high-yield gross supply is €45 billion ($47.6 billion) so far this year and expected to reach €65 billion in the coming year, also largely due to the growing near-term maturity wall, according to Goldman Sachs.
Net issuance is expected to flip to about flat in 2024 after two years of negative net supply.
Ultimately, it comes down to whether issuers are willing to accept a much higher funding cost relative to two or three years ago, which in turn could have consequences on their debt servicing capacity and interest expenses, among other things, according to Mr Karoui.
For the bulk of the high-yield market, however, this shouldn’t be an issue, he said.
“You’ll have to pay more, but I don’t think it’ll be problematic in terms of lack of investor demand.”