Since the Federal Reserve pushed through its first 25bp federal funds rate hike back in March of 2022, we have seen significant tightening in financial conditions across the US economy, however, these impacts have yet to fully seep into the US high yield market.
Consequently, a key discussion at the forefront of leveraged finance is, what does the ever-looming maturity wall look like over the next 12 to 18 months? A couple of weeks ago, we sent out a blog highlighting that the European high yield (HY) maturity wall was palatable, skewed towards higher quality bonds. Corporates have also been preparing to address these maturities for some time, boding well for the ability of European HY issuers to refinance their maturing debt. As we turn our attention to the US, we see the maturity wall over here as even less of a concern for the HY market.
Before we assess the impending obligations of US corporates, it makes sense to look back at what has happened over the past three years to shape today’s HY market. During the pandemic, the HY market experienced very heavy supply in 2020 and 2021, with $450bn and $483bn pricing, respectively. To put this into context, according to JPMorgan, the yearly average supply between 2010-2019 was just $305bn.
The most prominent use of proceeds within US HY new issues has been refinancing, which historically makes up ~60% of primary market activity. Through 2020 and 2021, the HY market opportunistically refinanced ~$587bn as market conditions made it incredibly attractive for firms to manage their debt profiles by extending out their maturities, reducing their interest expenses and building up robust cash positions. Combined with leverage loan refinancing activity, total refinances reached $1trn in 2020 and 2021 placing HY corporate liquidity in a resilient position.
Since then, the market has absorbed just $106.5bn of US HY issuance in 2022, a record-low year of issuance since 2008, and more recently in 2023, just $162bn year to date which is trending to be the third-lowest year of issuance since 2009. This has led to concern that corporates are now at a precipitous maturity wall that the market will not be able to digest.
Focusing on outright volumes, you can see from Chart 1, that through 2025, only $170bn of HY bonds mature, which equates to just 11.5% of the US HY market. This is heavily skewed to 2025 given 2024 maturities of only $43bn. Whilst it is true in the world of HY that companies usually refinance at least 12 months prior to maturity, to avoid any ratings pressure that might come with leaving their debt outstanding (meaning a significant percentage of the 2025 maturities may be refinanced in 2024), it does give corporates the ability to be somewhat flexible and opportunistic over the next 12-18 months as to when they may look to come to the primary market and refinance any outstanding obligations.
Whilst outright volume is of course an important dimension, it is also important to understand what the composition of that maturity wall is, as attention will typically be focused on the lower-rated cohort of maturing bonds. As you can see from Chart 2, the volume of B and lower rated debt that is maturing through 2025 is only $51.8bn, or 3.5% of the HY market (30% of total maturing bonds through 2025).
Looking even more granularly, at CCC, the lowest quality part of the credit spectrum and therefore names that are seen as most "at-risk", refinances through 2025 are a fractional 2% of the HY market (14% of total maturing bonds through 2025), with the majority skewed to 2025.
Source: ICE BofA US High Yield Index; October 2023. Included for illustrative purposes only. It is not possible to invest directly into an index and they will not be actively managed.
While the outlook for the HY maturity wall is less strenuous than many investors may have expected, as a HY investor, it is important to keep one eye on the other side of the leveraged finance world, the leveraged loan market, given many corporates issue in both markets as they look to blend their capital structures between leverage loans and HY bonds.
Whilst leverage loans assume the impacts of tightening in financial conditions much faster compared to HY bonds due to their floating rate nature, the maturity wall is still an important fundamental to monitor. Looking at the percentage of loans maturing within the next two years, there is less than 9% of the leverage loan market coming due, with most volume coming in 2025 rather than 2024. Just to provide some context, the leverage loan market sits at ~$1.4trn, so whilst there is a wall of debt, the short-term refinancing obligations are like what we see in HY.
When you knit all the above together, the maturity wall in leveraged finance is not as significant as many ‘headline grabbing’ articles have suggested. While refinances are not going to be as negligible as we have seen over the previous two years, we do believe that the fact most of these are in the BB space, along with the fact that issuers have been preparing to address these maturities for some time, as well as the natural demand that is sitting on the sidelines for HY new issuance, it does point to an environment that is conducive to a healthy primary market. All of this should consequently lend to a default rate, which although is trending higher, is still more or less in line with the historical average of 3.1%.
That is why, to us, it still makes sense to stay high in quality and avoid cyclical and idiosyncratic risks. Over the last 21 years, the “12-month jump to default from BB” rate is only 0.4%, and in our view, focusing on this rating class is prudent at this point in the cycle.