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HomeEconomyJunk-Rated Jitters: The $2 Trillion Debt Dilemma Facing U.S. Companies

Junk-Rated Jitters: The $2 Trillion Debt Dilemma Facing U.S. Companies

The investment landscape is quivering as U.S. companies teeter on the edge of a precarious cliff, looking down at nearly $2 trillion of junk-rated debt that’s coming due between 2024 and 2028. This staggering sum marks a notable 27% climb from the previous year’s figures, and entrepreneurs and investors alike are watching with bated breath.

What’s the source of all this market tension? Look no further than the anticipated persistence of high interest rates and tightening borrower conditions, a cocktail that could spell trouble for companies grappling with debt, especially those whose coffers aren’t overflowing with investment-grade securities.

Here’s the rundown: according to data from Moody’s Investors Service, we’re talking about $333 billion maturing in the next couple of years — a sum that accounts for roughly 18% of the total debt but has surged a whopping 25% since last year. Fasten your seatbelts, folks, because analysts are foreseeing the speculative-grade default rate peaking at an unsettling 5.6% by January 2024.

Why the uptick? The current economic script is dominated by the Federal Reserve’s history-making interest rate hikes, effectively turning the page on a chapter of easy money that businesses have been enjoying. This shift to a more expensive borrowing landscape means companies will be pinching pennies to afford the higher yields demanded by investors for riskier corporate debts.

And it’s not just a vague, overarching threat; it’s a pressing concern for companies rated B2 or lower, who are staring down the barrel of a $206 billion debt due in the next two years, a figure expected to skyrocket to an eye-watering $1.1 trillion by 2028.

Despite this looming debt dilemma, the well of credit issuance isn’t overflowing. The first nine months of 2023 saw a 24% dip in U.S.-marketed bank credit facilities compared to the same period in 2022. Though bond issuance has crawled up by 26%, it still lags behind pre-pandemic times — a hesitation dance between investors wary of fixed-coupon commitments amidst rising rates, and companies hoping for the winds of fortune to shift.

However, it’s not all doom and gloom. Borrowing costs have experienced a respite, dipping over the past year as the market sentiment takes a turn for the positive and recession qualms recede. Yet, there’s a caveat: the increasing “pull-forward” effect and “amend-and-extend” practices are ramping up refinancing risks, especially for corporate loans.

This trend, where companies consolidate multiple debt tranches under a single bank credit agreement, could potentially double 2024-26 bank debt maturities to a staggering $1 trillion. That’s about 80% of total five-year bank maturities, for those keeping score.

And the plot thickens: as lower-rated debt maturities take a larger share of the pie, the refinancing risks soar in tandem. Debt from companies teetering on the edge — those rated Caa or lower — now comprises 19% of the maturities for 2024-2025. That’s a notable jump from 16% in last year’s forecast.

So, what’s the takeaway for the savvy entrepreneur or investor? An increasing number of businesses, especially those already in the financial danger zone, could find themselves in a tight spot — unable to refinance their commitments at rates that don’t break the bank.

As we navigate this financial tightrope, the question remains: how will companies strategize to mitigate these risks, and how will the market respond to this $2 trillion question? The answer could redefine the investment playbook for years to come.