The world's riskiest borrowers are starting to run out of easy-money era financing and feeling the pinch as they return to a tougher market shadowed by aggressive central banks.
Junk-rated companies staring down a $785 billion maturity wall are in a race against time to replace debt that they secured when major central banks across the world slashed rates and boosted quantitative easing programs to keep economies afloat in 2020. On average, these companies now have 4.7 years to put fresh financing in place, the least amount of time ever, according to a Bloomberg global index.
After sitting out the public markets for the better part of the past two years, some of the biggest issuers are back. Italy's flagship phone carrier Telecom Italia headlines this month's expensive refinancings.
Much of the financing that's coming due stems from the pandemic, when the Fed swooped in to make credit cheap and easy to access for the most vulnerable companies, even pledging to buy certain types of high-yield debt. More than 40% of the maturity wall, or debt that needs to be refinanced between 2024 and 2026, was taken out then.
It's a different story today: central banks in inflation-fighting mode have created a hostile environment for issuers treading back to market. Refinancing costs, the extra interest companies have to pay when replacing debt, stand at about 3%, more than five times the average since 2018.
"Conditions are now much tighter," said Gilles Pradere, senior fixed income manager at RAM Active Investments. "There should be some refinancing needs going forward and potentially some problems."
Telecom Italia discovered just how much tighter this week, as it started marketing €750 million ($832 million) of bonds paying interest of 7.875% and offered to buy back notes due next year with rates of 3.625% and 4% respectively. Lottomatica and Schaeffler are among others paying higher debt costs to replace older securities.
Even once the Federal Reserve does start cutting rates next year, borrowing costs will remain far above the target of just over zero during the pandemic.
The situation is more urgent for issuers on the lower end of the spectrum. Those with single-B ratings have enough cash to cover interest expenses by 3.2 times, according to ABN Amro research. Their double-B rated peers have 5.6 times interest cover.
For Pradere at RAM Active, it recalls the prelude to the global financial crisis and the 2001 dot-com bust. Then as now, companies that loaded up on debt when costs were low got hit with a steep bill years later.
Meanwhile, some of the more stressed borrowers are looking to asset disposals in order to pay back their debt piles. Stonegate Pub has told investors that it is planning to sell 800 to 1,000 pubs by this summer. And grocer Casino Guichard Perrachon has been disposing of assets to cut debt it is now in the process of restructuring.
Still, the leap from historically low levels to costs approaching their Covid peak is bound to lead to defaults. Strategists at Moody's Investors Service expect the global high-yield default rate to peak at 5% by April 2024 from about 3.5% at the end of May.
"It's our job to find which companies can live through a move from 2% to 8-10%, if their business model stacks up," said Catherine Braganza, high yield and loans portfolio manager at Insight Investment. "We have to find companies that can live through a recession and change their business."
