Moody's: Record US spec-grade maturities will coincide with weak refinancing conditions

A record amount of US speculative-grade debt will mature over the next five years at a time when weak refinancing conditions will make it more difficult for lower-rated companies to access the capital markets, says Moody's Investors Service.

Total speculative-grade corporate debt will hit a record-high $947 billion between 2016 and 2020 and peak at $400 billion in 2020.

A range of credit market, macroeconomic and regulatory factors as well as company-specific factors, will make it more difficult for speculative-grade issuers to refinance their debt, according to the report "Refunding Risk and Needs 2016-20: Speculative-Grade Corporations -- US: Companies Face Record Maturities; New Issuance Wave Likely in 2017."

The report notes that companies typically address refinancing needs in advance of the debt maturity date.

"We expect a significant wave of new issuance in late 2016 and 2017, as companies begin to address their upcoming maturities" said Tiina Siilaberg, a Moody's Vice President and Senior Analyst. "However, a range of macroeconomic factors will make it more difficult for lower-rated companies to tap the debt capital markets in order to refinance their debt obligations."

Furthermore, Moody's three-year Refunding Index, which tracks whether there is enough liquidity in the credit markets to refinance upcoming debt securities, is currently below its historical average and stands at 2009 levels, indicating that the refinancing conditions are weaker than normal.

Moody's notes that these factors include rising interest rates, wider spreads, slowing growth in China and volatility in oil prices. Stricter application of federal Leveraged Lending Guidelines capping debt levels will also make it more difficult for lower-rated companies to refinance.

In addition, while CLOs will continue to play a significant role funding corporate issuers, there are funding risks as well. Although CLO issuance should be adequate to cover corporate refinancing needs, rising defaults and the impact of the Dodd-Frank Act's risk retention rule will make it more difficult for existing CLOs to supply corporate financing.

The telecommunications/technology/media sector continues to have the highest debt burden, but the sharp decline in oil prices has weakened the credit profiles of companies in the energy exploration & production, midstream, refining and marketing, and oilfield services and drilling sectors, and will likely increase the proportion of speculative-grade debt from these and the general commodity sectors.

"Baa3 rated companies in the energy related sectors have $34 billion in debt coming due over the next five years," said Siilaberg. "But there is a high risk that investment-grade issuers in these sectors will be lowered to speculative-grade."

This trend has been playing out in Moody's Liquidity Stress Index, where the energy sector continues to fuel liquidity downgrades and defaults. "These companies are already grappling with cash flow constraints and they will be tapping the markets just as increased regulation and slowing growth in China make the credit markets more risk-averse.