The mountain of bonds high-yield issuers need to roll over in order to avoid an oncoming wall of maturities has reached a roughly nine-year high.
That’s according to Moody’s, which says refinancing risk remains elevated based on their indicator tracking the gap between the issuance by corporations rated as speculative and the wave of bonds they have coming due.
Total issuance in the past three years from firms deemed speculative-grade by credit ratings firms slumped 42% year-over-year to $401 billion, Moody’s said in a Tuesday note. Meanwhile, high-yield bonds maturing over the next three years hit a record $172 billion. The ratio between the two indicators, a gauge of the ability of new issuance to cover oncoming maturities, fell to 2.3 times in Dec. 2018, from Dec. 2017. That marks its lowest levels since May 2009.
“The combination of lower bond issuance and heavy bond maturities points to a rising refinancing risk environment,” wrote Moody’s analysts.
The pressing need for issuers of high-yields bonds, or junk debt, to refinance their bonds reflects how issuers of such bonds sold less debt in 2018. The stock-market selloff towards the end of last year put off many high-yield issuers from accessing capital markets, with last month seeing no fresh debt arriving onto the market. Last year, the S&P 500 SPX, +0.63% and the Dow Jones Industrial Average DJIA, +0.64% recorded their worst December since 2008.
Moreover, the increased refinancing risk reflects the fast-approaching maturity wall — the hundreds of billions of corporate bonds set to mature in the next few years.
Investors of junk bonds, however, say fears surrounding the maturity wall often turn out to be illusory. As debt-laden corporations approach the maturity wall, they tend to refinance their bonds well before their maturity date. Most high-yield bonds are callable, in other words, issuers can choose to redeem their debts years before they are due.
But high-yield issuers who delayed the pressing task of refinancing their debts will now have to do so in a backdrop of elevated interest rates. That could raise the cost of servicing their bond payments when the U.S. economy and corporate earnings are slowing from their breakneck pace last year.
The average yield for a basket of high-yield bonds stood at 7.26% on Tuesday, well above the beginning of 2018 when the yield stood at 5.84%, according to an index run by ICE Data Services.
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